Category Archives: TSP

Avoid These Costly TSP Mistakes

mistakesThe Thrift Savings Plan is one part of the Federal Employees Retirement System, so it’s an important part of your retirement income. The following are mistakes you should avoid when it comes to your TSP account.

Not Updating Beneficiary Forms

This can have surprisingly large consequences. These beneficiary forms override any beneficiary designation stated in your will. If you haven’t updated these forms and you pass away, TSP pays out in the following order:

  • Spouse
  • Child/children equally, and descendants of deceased children
  • Parents equally or surviving parent
  • Appointed executor or administrator of your estate
  • Next of kin entitled to your estate under state laws in which you resided at the time of your death

If you haven’t selected a beneficiary but want to change who it is, submit a new form (TSP-3) and that one supersedes any previous forms.

Contribution Mistakes

If you want to change your existing TSP allocation, do an Inter-Fund Transfer. To change how your contributions are going into your TSP, do a Contribution Election change. And to change your existing TSP allocation and your contribution election, do both. The mistake here is most people who want to change how their money is allocated only do a contribution election.

Not Taking Responsibility of your TSP

The TSP is unlike your CSRS/FERS annuity in that there isn’t a magic formula for knowing what your benefit will be at retirement. You determine how much you contribute (up to the IRS limits), what’s best; a Traditional TSP, Roth TSO, or a combination, and how your TSP funds should be allocated based on your comfort level.

Having an Outstanding Loan at Retirement

If you leave federal service with an outstanding loan balance, you have the option to pay it back within 90 days of the date of your separation. If not paid back within those 90 days, the IRS will declare it as a taxable distribution. You also may be subject to the IRS 10 percent early withdrawal penalty unless you’ve separated from service in the calendar in which you turn 55 or older.

Not Keeping Money in Your TSP After Retirement

If you rollover all your TSP funds to an IRS and later decide you want to roll them back to the TSP, you won’t be able to. Be sure to leave some money (minimum of $200) in your TSP if you do a rollover to an IRA, just in case you ever decide to roll them back to the TSP.

Transferring to an IRS Before Age 59 ½

If you retire at age 55 or later and need to access your TSP, there will not be an early 10 percent withdrawal penalty. However, withdrawals taken from an IRA prior to age 59 ½ will be subject to the 10 percent penalty. If you are transferring to an IRA, make sure to leave enough in your TSP to cover any withdrawals needed prior to age 59 ½.

Not Contributing to the Roth TSP

Be proactive in the tax planning and take advantage of the Roth TSP. If you are a federal employee eligible to contribute to TSP, you’re also eligible to contribute to the Roth TSP. A Roth allows you to pay tax on the starting investment.

Also, keep the following in mind when choosing a Roth TSP:

  • You pay tax now in today’s known tax environment
  • Most people have fewer deductions in retirement
  • Most other retirement income sources are taxable

Planning for retirement takes just that; planning. The TSP plays a vital part in your retirement years. It’s important to do your research and fully understand the rules and regulations regarding your TSP. Doing so will help you avoid most, if not all, of these mistakes and maximize your investment.

Make sure to check out more costly mistakes by clicking the link below.

Costly Thrift Savings Plan Mistakes to Avoid

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Retirement Phases and Your TSP

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When you begin work in the federal government under the Federal Employees Retirement System, your agency automatically sets up a Thrift Savings Plan. Each pay period, they deposit an amount that is equal to one percent of your basic pay into that account. Of course, it is highly recommended that you deposit at least five percent of your basic pay to take advantage of the matching by your agency. It’s important to start depositing money into your TSP as soon as possible. The following will show how waiting to invest in your TSP can affect the different phases of retirement planning.

Early Career

This is the best time to take advantage of investing in your TSP. The best asset available to you at this point is time. Saving for retirement early in your career means you not only have years to save but also, it’s easier to weather any market fluctuations and gain the maximum benefit from compounding.

The table below, from TSP.gov, shows the power of saving as early as you can.

Savings per Month Years of Investing Rate of Return Value at 65
Scenario 1 $200 40 6.0% $400,289
Scenario 2 $200 35 6.0% $286,367

 

As you can see, just waiting 5 years to start saving, as in Scenario 2, significantly decreases your savings at age 65. In fact, using the numbers from the table above, the person from Scenario 2 would have to save $280/month for 35 years to achieve the same results as the person from Scenario 1.

*And if you’re a FERS employee, you should contribute no less than five percent of your salary to your TSP to receive the maximum agency matching contribution.

Mid-Career

If you haven’t started saving, it’s still not too late.

Catch-Up Contributions

If you’ve gotten a late start or maybe you don’t have as much accumulated as you wanted at this point, you can take advantage of catch-up contributions.

  • You must be 50 years or older in the year you plan to make the contributions
  • You must expect to contribute the max amount allowed of regular employee contributions for the year

Remember to do the Following

  • Check your asset allocations
  • Review investment experience and TSP balance
  • Reassess your retirement income needs and investment goals
  • Consider risk tolerance and make any necessary changes to your asset allocation
  • If necessary, increase your TSP contributions

Nearing Retirement

Even though retirement may be just a few years away at this point, it’s still not too late to start contributing to your TSP. And if you have been contributing your entire career, keep doing it as long as you can. Again, you can take advantage of catch-up contributions in this phase, if needed.

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New TSP Legislation Introduced

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Legislation has been introduced in the House of Representatives to allow federal employees to make multiple age based and post-separation withdrawal from their TSP accounts. The TSP Modernization Act of 2017 was introduced by Congressman Mark Meadows (R-NC) and Elijah Cummings (D-MD).

This bill allows participants to:

  • Revise the timing and amounts of periodic payments
  • Elect to combine partial withdrawals or an annuity with periodic payments
  • Make multiple age-based and post-separation withdrawals

It would also eliminate automatic annuities as a default option in the absence of an election by participants.

Under the current law, TSP participants are limited to one withdrawal from their accounts while in service upon reaching age 59 ½ (age-based withdrawal) and participants who leave federal service can make one withdrawal of a portion of the balance in the account (post-separation withdrawal).

“Our bipartisan bill would better align the TSP with other retirement plans offered by the private sector and state and local governments, and it would encourage participants to keep their TSP accounts to take advantage of low administrative fees even after they retire or separate from federal service,” Cummings said. “I thank the Federal Retirement Thrift Investment Board for working with us on this common-sense bill to give TSP participants what they want: greater flexibility to withdraw money from their accounts, to address unexpected life events.”

This bill is like legislation introduced earlier this year in the Senate, The TSP Modernization Act. The bill has the support of the Federal Retirement Thrift Investment Board (FRTIB), National Active and Retired Federal Employee Association (NARFE), the American Federation of Government Employees (AFGE), and the National Treasury Employees Union (NTEU).

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Social Security and Retiring Early

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The Federal Employees Retirement System has three parts; pension, Thrift Savings Plan, and Social Security. We all want to retire as early as possible, but do you know how possibly retiring early can affect the Social Security part of your pension or all of it?

You can elect to start receiving Social Security at age 62, however, the benefit will be permanently reduced. On the other hand, if you start your benefit at the Full Retirement Age (FRA), you’ll receive the full benefit. Your FRA depends on your year of birth. If you were born between 1943-1954, your FRA is 66. For every year after that, until 1960, your FRA increases by 2 months, with it being age 67 in 1960 and later.

There is also a third option. You can elect to delay the start of your benefit until after FRA, and you’ll receive Delayed Retirement Credits. Doing this can increase your benefit by 8 percent a year with a max at age 70.

Social Security is a lot like the TSP in the fact that the age at which you start receiving it can have a long-range impact on your retirement savings, good or bad. Below are some tips to help you understand the best time to start getting your benefit.

  • If I start taking Social Security at retirement, how much will I get?

    • It starts with your age at retirement in years and months.
    • If you retire UNDER the FRA, your year of birth determines your benefit amount.
    • If retiring AFTER the FRA and you elect Social Security after your FRA, you’ll receive Delayed Retirement Credits. That means your Social Security benefit will increase by 8 percent for every year you delay taking Social Security after your FRA, up to age 70. The benefit is based on how many months/years since the month of your FRA.
  • What if I wait to elect Social Security?

    • Waiting until age 70 will increase your monthly benefit for the rest of your life.
  • Is it worth it to wait?

    • If you delay starting your Social Security until after retirement, you need to calculate any TSP/saving withdrawals you’ll need. If you retire at 62 and delay Social Security until age 70, that’s 8 years of possibly withdrawing from you TSP. Not to mention, if there are unexpected expenses or a loss in the stock market.
  • Are there any earnings restrictions on the Social Security benefit?

    • There are special earnings restrictions that apply if you’re receiving Social Security before FRA. This can reduce or eliminate your benefit. However, there is no earnings restriction starting the month you reach your FRA.
    • Only wage earnings count from your job, or net earnings if self-employed. This does include bonuses, commissions and vacation pay. It does not count FERS pensions, annuities, investment income, interest, or veterans or other government/military retirement benefits.
    • The earning restriction has 2 sets of rules depending on how old you are. First, if you are under FRA for the entire year in 2017, Social Security deducts $1 from your benefit for every $2 you earn above the annual limit of $16,920. Second, if you reach FRA in 2017, Social Security will deduct $1 from your benefit for every $3 you earn above $44,880. They only count the earnings before the month of your FRA.
  • How does Social Security affect a spousal benefit?

    • Electing Social Security under FRA will permanently decrease spousal benefits, however, if you elect this at FRA, spousal benefits aren’t affected.

There’s so much to consider when planning for retirement, or even picking when you are going to retire. Sometimes, opting into a benefit will decrease another one. The more you know, the better you can plan.

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Lifecycle Fund Increment Changes Coming to TSP

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The panel overseeing the Thrift Savings Plan unanimously approved offering lifecycle funds targeted to within 5 years of the participants’ expected retirement date rather than the current 10-year increments. It was recommended that TSP investment options follow a trend from private 401k providers and offer lifecycle funds. These would move investors to a more conservative portfolio as they near their retirement date, on a 5-year basis.

TSP will begin implementing the new L fund increments in 2020.

It was also recommended that the TSP’s I fund, made up of international stocks and bonds, be diversified to include stocks in Canada, emerging markets, and international small-cap markets.

A financial consultant told the Federal Retirement Thrift Investment Board, “These are large markets to which we have no exposure. By adding these, we would improve the risk portfolio for participants, as well as improve outcomes on a forward-looking basis.”

The board further approved the examination of expanding the I fund’s portfolio. The deputy chief investment officer for the FRTIB said this could be done by this fall.

Blended Military System

TSP officials also briefed the board on their progress with preparing for the onset of the blended retirement system for the military, scheduled for January 2018. Under this system, new troops would automatically be enrolled in the TSP and receive a matching contribution from the government. The government will contribute 1-5 percent of the service members’ salary toward their TSP, depending on what they contribute themselves. Although, they will default into 3 percent of their paychecks. Their TSP account will begin 60 days into their service. Those who stay in the military for 20 years and are entitled to a retirement pension, would receive a smaller calculation of their annuity.

This new system automatically affects new service members starting January 1, 2018. Current service members are grandfathered into the existing system but can opt into the new one. The online opt-in website launched in April of this year and over 163,000 have already signed up.

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How to Maximize Your TSP

contributions

This question may seem like a silly one. You may even be thinking “Isn’t the point to contribute as much as possible so I can have the most money I can at retirement?”. Yes, you want to have the most money you possibly can at retirement. However, there comes a point when you can contribute TOO much to your TSP and you could miss extra money! So, are you a FERS employee contributing a significant percentage of your pay to your TSP? If you answered yes, you may want to read on.

Annual Limit

In 2017, the annual limit on elective deferrals (how much you can contribute in a calendar year) into your TSP is $18,000. If you reach this maximum contribution limit before the end of the calendar year, your contributions will get suspended.

FERS employees can receive as high as 5 percent of pay in TSP agency contributions. Of that 5 percent, 1 percent is what’s referred to as Agency Automatic Contribution and the remaining 4 percent is Agency Matching Contribution. The 1 percent Agency Automatic Contribution is automatically contributed to your TSP by the government whether you contribute or not. The Agency Matching Contribution is contingent on your contributions.

To receive the maximum Agency Match of 4 percent, you must contribute at least 5 percent of your pay per pay period. The matching schedule is as follows:

  • First 3 percent—dollar for dollar
  • Next 2 percent—50 cents on the dollar

Example

Basically, if you contribute more than $693 per pay period ($693 x 26 pay periods = $18,018), you will find yourself leaving free money on the table. Make sure you know how much you can contribute to ensure you receive the full match.

First, determine how much you have contributed year to date (not including agency contributions), then subtract that from $18,000 and divide by the number of remaining pay periods. The resulting amount is the dollar figure you need to contribute per pay period through the end of the year.

To learn more, follow the link below.

Can Contributing Too Much to Your TSP Actually Hurt You?

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New Legislation Could Expand TSP Withdrawal Options

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The TSP Modernization Act, introduced by Senators Rob Portman (R-OH) and Tom Carper (D-RI), could allow for more flexible withdrawal options. One of the primary goals of the bill is to encourage federal workers to leave their savings in their TSP after leaving federal service because of its low fees.

In a press release, Senator Portman calls the current withdrawal rules “overly restrictive” and says the rules are almost forcing federal workers to transfer their retirement accounts to ones with higher fees. This new legislation would make four changes, outlined below.

Age-Based Withdrawals While in Service

Currently, the TSP rules only allow for one age-based withdrawal while employed. This new bill would allow for multiple age-based withdrawals and subsequent post-separation withdrawals.

Partial Post Separation Withdrawals

Now, the rules allow for one partial post-separation withdrawal and none for those who made an in-service age-based withdrawal. And after these, only full withdrawal options are available. However, this new bill would add some individual flexibility by allowing multiple partial post-separation withdrawals.

Full Withdrawal via Periodic Payments

Currently, periodic payments can only be selected in monthly intervals. Also, the payment can be adjusted only once per year and must occur just prior to the beginning of the next calendar year. These payments can be reduced to as low as $25/month but recurring payments can’t be stopped unless a participant withdrawals the entire remaining balance. Those enrolled in periodic payments status can’t elect a partial withdrawal or annuity purchase.

Eliminate Withdrawal Election Deadline

This bill would eliminate this deadline which currently requires TSP participants to make a post-separation withdrawal election by April 1st of the year following the year in which they turn 70 ½ and are separated from federal service. This is separate from the IRS requirements to begin distributing RMD’s on the same day.

The Federal Retirement Thrift Investment Board (FRTIB), who administers the TSP, supports this new bill. The Executive Director said, “We are very appreciative of Senators Portman and Carpers’ leadership on this important issue. Enactment of this legislation will meaningfully improve TSP participants’ ability to responsibly access their retirement savings.”

Learn more about these changes by clicking below.

TSP Withdrawals Could be Expanded with New Legislation

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New Rule for Public Safety Officers and Their TSP

tspThere are special retirement rules for FERS and CSRS employees covered under the Special Retirement Provisions. This can cause a challenge when these employees become eligible to retire because they can become eligible at a younger age and have a mandatory retirement age.

Special Retirement Provisions Rules

Employees in these positions are eligible to retire at age 50 with 20 or creditable service or at any age with 25 years of creditable service. As far as the mandatory retirement age, employees must retire by the last day of the month in which they reach age 57 for Law Enforcement Officers, Firefights, and Military Reserve Technicians, and age 56 for Air Traffic Controllers.

TSP Rules

There are special rules when taking a withdrawal from your TSP. You must be at least 59 ½ and if you are younger, you could face a 10 percent early age withdrawal penalty plus a possible state penalty. The exception is if you retire or separate from service in or after the year you turn 55. In this case, the TSP early age withdrawal penalty is waived.

Because these safety officers are eligible to retire at an age younger than 55, they were hit with an early withdrawal penalty until they reached 59 ½. The Defending Public Safety Employee’s Retirement Act grants an exception to the early age withdrawal penalty for certain public safety officers. As of January 1, 2016, a public safety officer who retires or retired at age 50 or older can include TSP income without consequences of the early age withdrawal penalty. This can also be included in TSP income plans from day 1. These new rules only cover withdrawals from a TSP, so if you transfer your TSP to an IRA or another outside source, you will lose that waiver.

The Defending Public Safety Employees’ Retirement Act only specifically mentions Law Enforcement Officers, Firefighters, Customs and Border Protection Officers, and Air Traffic Controllers.

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