The 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:
- 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.
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.