The good things about the TSP don’t change the fact that there are some bad things, but you should be able to avoid them. Image: peterschreiber.media/Shutterstock.com
“You’ve got to take the bad along with the good.” Most of us have heard that saying many times over our lives. Is the Thrift Savings Plan a good or bad thing? We all should agree that it’s a good thing; it helps us save for our future retirement and has a lot of good features like the following.
Good thing 1. The TSP’s low expenses. The TSP funds have among the lowest expenses in the business. There are several reasons for this that include: 1) The TSP funds are all low cost index funds; 2) The TSP doesn’t spend money advertising like many private sector plan providers do; 3) Forfeited TSP contributions and loan application fees are used to lower expenses for plan participants.
Good thing 2. The generous match received by FERS participants. Around 20% of private sector 401(k) plans have no match at all, and the average match for those that do is $0.50 on the dollar up to 6% of salary: or a 3% total match. If a FERS or BRS participant is contributing 5% of their salary to the TSP, they are getting a government match of 5%. Not too shabby!
Good thing 3. TSP participants are allowed to change their contribution allocations (both the amount that is contributed and where it is invested) each and every pay period if they wish to do so.
Good thing 4. Two reallocations or fund transfers are allowed each month. These actions allow participants to re-balance their TSP accounts by re-allocating the money that is already in the TSP. In fact, more than two are allowed as long as the extra transfers move money only into the G fund.
Good thing 5. It’s easy to roll over money from your TSP to IRAs and other tax deferred investments once you have separated. You can also roll money from qualified plans and accounts into your TSP (you can do this while working as well as after you have separated).
Good thing 6. Changes to the TSP over the last several years. Starting with the Thrift Savings Plan Modernization Act which was implemented in 2019. The TSPMA made withdrawal choices much more flexible than they were before. They’re not as flexible as what you would find in an IRA, but they will satisfy the needs of most separated participants. The SECURE Act and SECURE 2.0 added some more flexibility in 2020 and 2023 respectively, though they tightened up the rules for beneficiaries. In the summer of 2022 TSP investors were allowed to invest in mutual funds through the mutual fund window.
The above good things don’t change the fact that there are some bad things lurking around the edges of the TSP, but if we pay attention, we should be able to avoid them.
Bad thing 1. Penalties if we take money out at too young an age. If you separate and take money from the TSP prior to the year in which you turn 55 you will owe a 10% early withdrawal penalty on your traditional TSP withdrawals in addition to the regular federal income tax that is due. For special category employees the penalty can be avoided if they separate in the year they turn 50, or if they have 25 years of qualifying special category service. This bad thing could be avoided by taking payments based on the IRS life expectancy table for the longer of 5 years or until reaching the age of 59 ½.
Bad thing 2. Having to pay tax on earnings in your Roth TSP if you make a non-qualified withdrawal. The Roth TSP lets us avoid taxes on earnings if our withdrawals are qualified, but in order for a withdrawal to be qualified, we need to have had the Roth balance in our TSP for at least five years and we must be at least 59 ½. This bad thing can be avoided by taking distributions only from your traditional TSP balance until the time you reach 59 ½.
The final tally shows that the good things far outweigh the bad things. Hooray for the TSP!
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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