John Grobe, Federal Career Experts
Halloween is past and Thanksgiving is coming up. Autumn is my favorite time of year, with the fall colors, the coming winter, the World Series and the beginning of the NFL Season. Being a fan of Chicago sports takes a little of the excitement off of the last two items in the previous sentence.
Halloween brings us horrors and scary things. What scary things does the TSP offer us?
Scary 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 (50 for special category employees), you will owe a 10% early withdrawal penalty on your traditional TSP withdrawals in addition to the regular federal income tax that is due.
Scary 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.
But, after Halloween, we approach Thanksgiving. What reasons does the TSP give us to be thankful?
Reason to be thankful 1. The TSP’s low expenses. The TSP funds have among the lowest expenses in the business. There are several reasons for this that we won’t delve deeply into here, but they include: 1) The TSP funds are all low cost index funds; 2) The TSP doesn’t have a large advertising budget; 3) Forfeited TSP contributions are used to lower expenses for those who remain in the plan.
Reason to be thankful 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 3% total. 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!
Reason to be thankful 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.
Reason to be thankful 4. Two interfund transfers are allowed each month. Interfund transfers 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 into the G fund.
Reasons to be thankful 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 while working as well as after separation.
Reasons to be thankful 6. The Thrift Savings Plan Modernization Act of 2017. Thirty years after the introduction of the TSP, the Board finally took some steps to make withdrawing from the plan easier. The act which was implemented in September of 2019 made withdrawal choices much more flexible that 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.