Many TSP participants believe that they are not allowed to contribute to an IRA if they are fully funding the TSP; not true. Image: pogonici/Shutterstock.com
By: FEDweek StaffThe Thrift Savings plan, though simple in design, can get confusing in the details. There are some misconceptions that many participants have about their TSP, and we’ll look at them here.
Many participants think that they will face a 10% early withdrawal penalty on anything they take out of the TSP before they reach the age of 59 ½. This is not true in almost all situations. If you are a regular employee that separates and withdraws money from the TSP in the year in which you reach the age of 55 (or later) there is no early withdrawal penalty. If you are a special category employee e.g., law enforcement officer, firefighter, air traffic controller, etc.), the age is 50. It’s Individual Retirement Arrangements (IRAs) that assess early withdrawal penalties for money taken out before age 59 ½. The TSP (and other employer sponsored plans) do not.
The situation where the TSP will impose an early withdrawal penalty is if an employee separates before the year in which they reach the age of 55 (50 if a special category employee). However, even that penalty can be avoided if the employee follows a life expectancy based withdrawal methodology for the longer of 5 years or until they reach 59 ½ (sometimes called Rule 72t).
Many TSP participants believe that they are not allowed to contribute to an IRA if they are fully funding the TSP; not true. Though the TSP and IRAs are related (they are both devices you use to save for retirement), they are different, as one is an individual plan and the other is an employer sponsored plan. If you haven’t been contributing to an IRA because you have been fully funding the TSP, you have been missing out on an opportunity to set aside another $6,000 ($7,000 in the year you turn 50 and later) in 2022. You can make 2022 contributions through April 18, 2023. The 2023 IRA contribution level has been raised to $6,500 (with no increase in the catch-up amount). Though there are income based restrictions on deducting your contributions to a Traditional IRA and on contributing at all to a Roth IRA, anyone (even Jeff Bezos, Warren Buffet, and Elon Musk) can fund a Traditional Non-Deductible IRA.
The TSP is an individual account (not a joint account) and you can only roll money into it from a qualified individual account that is yours. You cannot roll your spouse’s 401(k) from a prior employer or your spouse’s IRA into your TSP. If your spouse has qualified money that they wish to roll over, they can set up an IRA in their name with another custodian.
The TSP can only be funded two ways: by payroll deduction or by a rollover from a qualified plan. If you have money in a non-qualified account, it cannot be deposited in the TSP. So, money in your brokerage account, Aunt Karen’s bequest, lotto winnings, etc. cannot go into the TSP.
Catch up contributions no longer have to be separate from regular contributions. Up until 2021, we told you that catch up contributions have to be separate, and that you risked losing the government match if you simply added the catch up amount ($7,500 in 2023) to your regular elective deferral amount. Forget everything we told you about catch up contributions in the past; now, when you are old enough (i.e., when you reach the year in which you turn 50) you simply increase your regular contribution by the catch up amount. If you were contributing the maximum ($22,500 in 2023), you would simply increase it by the $7,500 catch up contribution and make your contribution amount $30,000.
With these misconceptions, what you don’t know can hurt you. If you read each edition of FEDweek’s TSP Investor’s Report, you will be kept up to date on the rules relating to the Thrift Savings Plan and be better able to take advantage of all it has to order.
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