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Did you know this about the TSP?

Learn a little more about the government’s 401(k)-style retirement plan.

The Thrift Savings Plan is the cornerstone of the Federal Employees Retirement System created in 1986. By understanding the key elements of the program, federal employees and uniformed service members can create a retirement plan that may be achieved sooner and be more comfortable thanks to the efforts made by the TSP to encourage new hires to take advantage of the retirement savings program starting on day one, by keeping all participants informed on ways to manage their TSP and making the most of changes that allow greater choice and options.   

Did you know that new federal employees are automatically enrolled in the TSP with 5% deducted from their paychecks? This means that they begin receiving the full government contribution of 5% from day one. That’s 10% of basic pay going into one of the TSP Lifecycle Funds from the first day on the job. The L Fund chosen for a new hire is a longer-term fund for younger hires and a shorter-term L Fund for those coming into the government later in their careers.  Each of the 10 L Funds is a diversified mix of the five individual funds (G, F, C, S, and I). They were designed to let you invest your entire portfolio in a single L Fund and get the best-expected return for the expected risk that is appropriate for your age.   

Did you know that 38% of the 6,975,339 TSP accounts are invested 100% in the L Funds? As of Nov. 30, 2023, the most popular L Fund was the L 2050 with 1,322,000 TSP accounts using this fund. According to the TSP, you should consider using this fund if you were born between 1985 and 1989 or plan to withdraw from your account between 2048 and 2052. Federal employees born during those years would be between 35 and 39 years old today, and according to recent OPM statistics, a little less than 400,000 of the 2.9 million federal employees fall into that age bracket. Perhaps some feds are investing more aggressively in hopes of getting a better rate of return or maybe they are targeting a later date to begin using their savings.      

Did you know that the TSP has a social scientist on their staff who uses behavioral science – a mix of psychology, behavioral economics, and neuroscience – to understand individual decision-making in the real world? For example, Elizabeth Perry, chief scientific advisor, and her team reached out to roughly 10,000 federal employees who were in the lower 20% of salary for their payroll system and contributing 3% of their salary to TSP – below the full-match threshold of 5%. The team sent three versions of an email message, with a goal to help people increase their contributions. A fourth group received no email at that time. All emails pointed out the benefits of getting the match and provided clear action steps that participants could take to make a change, if desired. The first group’s message stated that for someone earning $50,000 a year, 5% is about $7 a day and could lead to thousands of dollars in matching each year. The second group’s message stated that more than 80% of federal employees contribute enough to get the full match. The third group’s message included the phrase, “don’t leave free money on the table.” After three months, contributions from groups one through three were significantly higher than the fourth group that did not receive an email. It was unclear which of the three approaches was most successful, though the “dollars per day” message appeared to be leading. The average increase was about $80 per month, resulting in roughly an additional $40,000 if that amount is maintained through age 65 (based on median ages). 

Did you know that at the end of November, the TSP held $814,000,000,000? Yes, that’s $814 billion! Of that total, $324.4 billion was invested in the C Fund which represents close to 40%t of the total amount in the TSP.  The next most popular fund is the G Fund which had a balance of $294.1 billion as of the same date, representing 36.1% of the total. The remaining allocations were 3.9% in the F Fund, 11.1% in the S Fund, and 9% in the I Fund. This includes the amounts in the L Funds. The L Funds make up 24.2% of the total TSP investment holding $196.7 billion of the $814.5 billion in the TSP.  

Did you know that if you are separated from federal service and you don’t take the full amount of your Required Minimum Distributions each year, you may be subject to an IRS excise tax? The Setting Every Community Up for Retirement Enhancement Act of 2022, which President Biden signed into law on Dec. 29, 2022, reduced that tax from 50% to 25% of the amount not paid to you on time. It further reduces the excise tax to 10% of that amount if you corrected the amount within two years. 

Did you know that effective this year, Roth balances are no longer subject to RMDs before a participant’s death? Your RMD calculation includes only your traditional balance and only distributions from your traditional balance count toward satisfying the RMD amount. If you have a Roth balance in your TSP account, this means your RMD amount may be less than it would have been before 2024. If you have inherited a TSP balance from your spouse and you have maintained a Beneficiary Participant Account with the TSP, your RMD distributions will still include the entire account balance, and any distribution from a spouse-beneficiary participant account still counts toward satisfying the RMD. 

Did you know that if you have retired as a qualified public safety officer, your distributions won’t be subject to the 10% early withdrawal penalty for TSP payments made after you separate from service during or after the year you reach age 50 or have 25 years of service under the TSP? For everyone else, if you separate from service during or after the year you reach age 55 you won’t be subject to the 10% early withdrawal penalty as well. For a complete list of exceptions to the “under 59 ½” 10% early withdrawal penalty,” see Tax Rules About TSP Payments. 

Did you know that in 2024, the Federal Retirement Thrift Investment Board will change the I Fund’s benchmark index? This change will further diversify I Fund investments and give TSP participants access to more markets and companies. Based on a thorough analysis, the Board expects the new index to offer opportunities for higher returns without a significant increase in risk. The I Fund’s current benchmark is the MSCI Europe, Australasia and Far East Index. The future I Fund benchmark will be the MSCI All Country World Investable Market Index ex USA ex China ex Hong Kong Index. 

If you didn’t know this information or you would like to learn more, visit Plan News and Secure 2.0 and the TSP and, stay up to date by reading the minutes of the FRTIB meetings generally held on the fourth Tuesday of each month.