Whether just starting your career or preparing for retirement, saving money is critical to financial stability. One of the best ways to save money is with a Thrift Savings Plan (TSP) account. TSP accounts are retirement savings offered by the government to federal civilian employees and members of the uniformed services.
They are a great way to save for retirement due to their low fees, tax advantages and government match. This writing discusses everything you need to know about TSP accounts, including eligibility requirements, types of accounts, contributions limits and how to withdraw funds.
With the right knowledge and plan, you can use a TSP account to create a comfortable and secure retirement.
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Defining a Thrift Savings Plan (TSP) Account
A Thrift Savings Plan (TSP) Account is an investment program offered to federal employees and uniformed service members. It was established in 1986 through the Federal Employees' Retirement System Act, which sought to create a retirement savings plan similar to private sector 401(k) plans.
The TSP was created to help federal employees and members of the uniformed services save for retirement. The program allows eligible individuals to invest a portion of their salary in a retirement savings plan. This money can then be used to supplement Social Security benefits or other sources of income when they retire.
The TSP also allows participants to make catch-up contributions if they are over 50 and have not taken full advantage of their TSP account. Also, the TSP offers loan provisions that allow participants to borrow from their accounts to meet certain needs.
Who Is Eligible for a TSP Account?
Eligibility for a Thrift Savings Plan (TSP) account is based on employment status. Generally, individuals employed by the federal government, including members of the uniformed services, are eligible to participate in a TSP account.
Additionally, former federal employees who have maintained their TSP accounts may continue contributing. Non-appropriated fund participants such as those employed by the Air Force Exchange Service and Army and Air Force Motion Picture Services, are also eligible for TSP accounts.
To be eligible for a TSP account, an individual must be at least 18 years old or legally emancipated. Participants must also receive payments from their employer and meet certain Internal Revenue Service requirements.
In addition, those eligible for a TSP account must have a valid Social Security Number (SSN). Non-U.S. citizens with a valid SSN may open a TSP account and contribute to it, but foreign citizens without a valid SSN cannot open a TSP account.
Types of TSP Accounts
Like IRAs and many 401(k) plans, TSP accounts offer both traditional and Roth account options. These choices affect only the tax treatment of your contributions and investments.
Taxes must be paid when money is deposited into a TSP or withdrawn.
A traditional Thrift Savings Plan (TSP) account is an employer-sponsored retirement savings plan which allows employees to save pre-tax money for their retirement. These contributions are excluded from the employee's gross income and are not subject to federal income tax until the funds are withdrawn.
Withdrawals from a traditional TSP account are taxed as ordinary income, meaning any withdrawals are subject to the current federal income tax rate.
A Roth Thrift Savings Plan (TSP) account is an employer-sponsored retirement savings plan which allows employees to save after-tax money for their retirement. Contributions to a Roth TSP are made with post-tax dollars, meaning that the employee pays taxes on these funds before they are deposited into the account.
Withdrawals from a Roth TSP account are tax-free and not subject to any federal income tax. Additionally, Roth TSP contributions do not count against the employee's annual contribution limit for retirement savings plans, making them a great way to maximize retirement savings.
TSP Contributions Limits
The contribution limits for the TSP in 2023 have been set by the Internal Revenue Service (IRS). The annual maximum amount employees can contribute to their TSP accounts will be $22,500, with an additional $7,500 catch-up contribution allowed for those aged 50 or older. This is a slight increase from the 2021 and 2022 contribution limits, which are $19,500 and $20,500, respectively.
TSP Withdrawal Rules
The rules for withdrawing money from a TSP account can vary depending on your withdrawal. Generally, TSP withdrawals are either Traditional or Roth withdrawals.
Traditional TSP withdrawals are subject to income tax and may be subject to an additional 10% early withdrawal penalty if you are under age 59 ½ at the time of withdrawal. You must also pay a processing fee of $50 for each withdrawal request. In addition, you must meet certain requirements to be eligible for a Traditional withdrawal such as having five years of federal service or reaching age 59 ½.
Roth TSP withdrawals are not subject to income tax but may be subject to an additional 10% early withdrawal penalty if you are under age 59 ½ at the time of withdrawal. Unlike Traditional TSP withdrawals, there is no processing fee for Roth withdrawals. However, you must meet certain requirements to be eligible for a Roth withdrawal such as having five years of federal service or reaching age 59 ½.
Regardless of your withdrawal type, all withdrawals from a TSP account are permanent and cannot be reversed. Once you have withdrawn funds from your TSP account, you cannot re-deposit them or make additional contributions to the account until you have re-enrolled.
Government Match on TSP
The Federal Government matches employee contributions up to 5% of basic pay. This means that if an employee contributes 5% of their pay, the government will also contribute 5%. The Government match will be invested in the same fund(s) as the employee's contribution and the money will become available for withdrawal when the employee retires.
The Government match is not taxed until it is withdrawn, which can help employees save more for retirement. To be eligible for the Government match, an employee must meet certain requirements, including contributing at least 5% of their pay each pay period.
Employees who contribute less than 5% may still be eligible to receive a partial match on their contributions. Additionally, employees must be with their employing agency for at least three years before they can withdraw any of the money they contributed to the TSP.
Types of Funds Offered by a TSP
The TSP offers five different types of funds for investors to choose from:
The Thrift Savings Plan (TSP) is a great retirement saving for federal employees and military members. With low fees and tax advantages, it can be an ideal way to save for retirement. TSP accounts are available in traditional and Roth IRA types, each providing different tax benefits.
Eligibility requirements depend on the type of account but generally include active or former federal employees and members of the military. Withdrawal rules differ depending on the type of account, age and other factors, so it is important to understand the details of each account before investing.
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