GotCredit.com

3 Things You May Not Understand About the TSP

Misperceptions about the investment program persist.

In last week’s column, we got into some Thrift Savings Plan issues that were fairly complicated, such as whether or not to take a lump-sum payment and use it to eliminate debt. This week, the TSP is the focus again, but I’ll keep things a little more simple.

Here are the top three things that employees sometimes misunderstand when it comes to their TSP accounts.

How Does Matching Work?

One of the key features of the Federal Employees Retirement System is that employees receive agency automatic and matching funds in their TSP accounts.

Here’s how it works: Your agency automatically contributes 1 percent of your basic pay (including locality pay) to your TSP account. It also starts matching your own contributions as soon as you start making them. So if you contribute 1 percent of your basic biweekly salary, you will receive 1 percent in matching contributions, along with the automatic 1 percent agency contribution.

If you contribute up to 3 percent of your basic pay, the matching is dollar for dollar. If you contribute 4 or 5 percent of your basic pay, the matching on the additional contributions is fifty cents per dollar of your contribution. After you contribute 5 percent of your biweekly salary, there is no matching agency money. That’s why some people say you should contribute at least 5 percent of your pay so you don’t “leave money on the table.”

It’s important to note that the matching is on a biweekly, not annual, basis. Just this week, I met an employee who was going to have $18,000 (the elective deferral limit for 2017) already invested in his TSP account out of his salary by the end of August. So he won’t receive matching contributions from his agency until the 2018 pay year begins.

If your TSP allotments stop for any reason during the year (for example, if you voluntarily suspend your contributions, elect too large a biweekly allotment so you eventually exceed the annual limit, or take a financial hardship withdrawal and thus aren’t permitted to contribute for a period of time), you will no longer receive agency matching funds.

It’s important to evaluate your contribution strategy at the beginning of each year to be sure you receive the full agency match throughout the year. To learn more, read the TSP pamphlet, Annual Limit on Elective Deferrals.

What Is a Full Withdrawal?

The concepts of full withdrawal and required minimum distributions from the TSP can be confusing. Some people think a full withdrawal requires a lump-sum distribution of their entire account balance. I’ve also heard people say that at age 70 ½, you have to take all of your TSP funds out of your account. Both statements are false. You’re never required to withdraw your entire account balance in a lump-sum payment unless you have a balance of less than $200.

According to the TSP booklet, Withdrawing Your TSP Account After Leaving Federal Service, a full withdrawal is simply a designation of how much of your total account balance you wish to withdraw as a single payment, series of monthly payments or a life annuity. You may designate 100 percent to one of the options, or divide it between the choices.

Suppose, for example, you designate 50 percent of your account to be withdrawn via a cash payment. The TSP will pay this to you or allow you to transfer some or all of it to another retirement account, such as an individual retirement arrangement. For the other 50 percent, you could choose a series of monthly payments or purchase a life annuity. The monthly payments can be a specific dollar amount, or you can let the TSP compute payments for you based on life expectancy charts.

You can postpone deciding what to do with your money after you separate from federal service, but you must make a choice after you are separated and older than 70½ to avoid a penalty. This election must follow the rules for required minimum distributions established by the IRS. The same three withdrawal options are available at the time you face this deadline, so you won’t have to deplete your entire account balance in one lump-sum payment.

It’s important not to deplete your TSP account too quickly. You need a strategy to make the money last as long as you live. Remember that the C, S, I and F funds may experience negative returns from time to time. Your account will continue to accrue earnings after you’re retired, and you can continue to change the way your money is invested by making interfund transfers.

Be aware of the impact of inflation as you make your post-retirement withdrawal choices. According to the TSP, an inflation rate of 2 percent per year would reduce a $150,000 account balance to the purchasing power of only $82,811 after 30 years. Continued earnings are important to maintain your buying power. Volatility in returns can create anxiety. But keeping all of your money in the ultra-safe G Fund may not be the answer, because it may not allow for enough growth to keep ahead of inflation. This is why financial professionals emphasize maintaining a healthy balance between all of your investment options. The TSP’s life cycle funds can do this for you, adjusting investment choices to get more conservative over time.

A good rule of thumb is to never withdraw more than 3 percent to 4 percent of your account balance in a single year and to maintain some of your account balance in the stock funds and the fixed income (F) fund to balance risk and return.

Can You Really Catch Up With Catch-Up Contributions?

If you are 50 or older (or will turn 50 during the calendar year), you can make additional contributions to your TSP account over and above the annual elective deferral limit ($18,000 for 2017). These are known as “catch-up” contributions. In 2017, you can make an additional $6,000 in contributions. There is no agency match for such contributions. The funds will be invested according to your most recent account allocation in the same manner as your regular TSP contributions.

Catch-up contributions will not necessarily make up for not contributing for the first 20 years of your career, however. It’s important to understand the value of investing over long periods of time. There is a powerful illustration of this on the TSP website showing that an investment of $4,000 per year (of employee and agency contributions) at a 6 percent average annual rate of return will have a balance of $54,699 in 10 years, $154,220 after 20 years, $335,288 in 30 years and $664,722 after 40 years. You can try this for yourself by using the TSP’s online savings calculator.

The TSP is a critical element of the retirement planning toolkit for FERS employees. But to make the most of it, you need to know how it works.

Photo courtesy GotCredit.com

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.