Federal Employee's CSRS & FERS Thrift Savings Plan (TSP) Review
The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees. Congress established the TSP in the Federal Employees' Retirement System Act of 1986. The purpose of the TSP is to provide retirement income. The TSP offers Federal employees the same type of savings and tax benefits that many private corporations offer their employees under "401(k)" plans. The National Defense Authorization Act extended participation in the TSP to members of the uniformed services, including the Ready Reserve.
If you receive a TSP withdrawal payment before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10% of any portion of the payment not transferred or rolled over. However, if you are age 55 or older in the year you separate or retire, the 10% early withdrawal penalty tax does not apply. See resources for additional tax information.
The Thrift Savings Plan is an important benefit designed to help FERS, CSRS and CSRS Offset federal employees save for their future. The TSP offers all participants:
The TSP is especially important for FERS employees because it is one of three parts of your retirement coverage. Employees can contribute a significant portion of their basic pay each pay period, up to the IRS annual limit. CSRS employees do not receive Government contributions in their TSP accounts. However, CSRS employees can still take advantage of the TSP to provide a source of retirement income in addition to your CSRS retirement benefit.
The amount you can contribute changes annually. You may elect to contribute any dollar amount or percentage of basic pay. However, your annual dollar total cannot exceed the Internal Revenue Code limit, which is $22,500 for 2023 and $7,500 for catch up contributions over age 50. A person age 50 or older can contribute a combined $30,000 a year into their TSP account!
Contributing as much as you can to TSP retirement coverage is simply a smart financial move. Invest money in yourself and your future instead of giving the government an interest free loan in order to get back a large refund check annually after taxes.
Note: The TSP stipulates that it is not an IRA, and Roth TSP contributions should not be reported as Roth IRA contributions. In addition, the TSP isn’t a 401(k) plan, it is an eligible employer plan governed under Internal Revenue Code (IRC) § 401(a). Therefore, certain rules and regulations associated with satisfying RMDs for IRAs and 401 (k) plans may not apply to the TSP. Under the 2022 Secure Act 2.0 RMDs will no longer apply to Roth money in your TSP account.
Question: I have been planning for retirement for some time. I want to withdraw partial sums from the Plan after separation and roll each of them over directly into my Roth account. What are the tax consequences?
Answer: The key is in the type of IRA. When you rollover any investment account that hasn’t yet been taxed (TSP, traditional IRA, 401k) to an after-tax investment account, such as a Roth IRA, taxes must be paid to Uncle Sam at the time of the rollover.
If you want to avoid being taxed on the entire rollover amount, you can leave the funds in TSP (provided the amount is over the minimum) or roll the account over to a Traditional IRA.
Before electing to rollover the entire amount out of TSP you should consider the administrative expenses of the new investment. If you leave a minimum balance in TSP and keep the funds in a pretax account (traditional IRA), you will be able to roll funds back into TSP if you elect to do so. Also carefully examine the withdrawal reasons and age for withdrawal, as they are different in TSP than other IRA type accounts.
Federal employees should consider contributing the maximum amount possible; especially FERS employees that must often rely on TSP withdrawals to maintain their standard of living in retirement. The maximum TSP contribution for 2023 is $22,500 and if you are over age 50 add an additional $7,500 catch up contribution is possible. The $22,500 divided by 26 pay periods equals a $865.38 contribution per pay period plus an additional $288 if you are over age 50. Most agency employees will need to make the change effective in pay period 26 to affect the first pay period in January, 2023.
Secure Act 2.0 Changes
Changes to participant catch-up contributions begins January 1, 2024. This change allows account holders with wages below $145,000 in the preceding year to choose traditional or Roth accounts for catch-up contributions.
If the participant’s wages exceed $145,000 in the preceding year, all catch-up contributions must be treated as Roth.
Beginning on January 1, 2025, the catch-up contribution limit for participants ages 60-63 will be increased to the greater of (1) $10,000 or (2) 50% more than the regular catch-up amount in 2025.
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