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Federal Thrift Savings Plans (TSP)
The Federal Thrift Savings Plan, commonly referred to as the “TSP,” is a defined contribution retirement plan for employees of the federal government. Both the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS) employees can participate in the TSP. The TSP rules are different for each group.
The TSP has many similarities to a 401(k) plan. Employee contributions made by both FERS and CSRS employees are made with pre-tax money. All contributions and earnings are tax-deferred while they are in the plan. Only FERS employees can benefit from agency (employer) automatic contributions and agency matching contributions.
Distributions & Taxation
Subject to certain exceptions, distributions cannot be made until an employee leaves federal service.
The general tax rules described below are the federal income tax rules as of 1 January 2021 and may be subject to exceptions. Always check your state (and local) income tax rules on the TSP. Finally, since tax laws may (and probably will) change from time to time, always check with your tax advisor before making major decisions regarding your TSP.
Eligibility
Only federal government employees are eligible to participate in the TSP.
Employee Contribution Limits
For both FERS and CSRS employees can contribute the lesser of:
$58,000 in the year 2021 or
10% of basic pay for FERS employees (5% of basic pay for CSRS employees)
Employee contributions are made through payroll deductions each pay period (e.g., every two weeks) by either a fixed percentage of wages or a dollar amount.
Note: “Basic pay” is a term defined by law and is the amount used to calculate the deduction for your FERS or CSRS annuity. Basic pay doesn’t include such things as bonuses, many forms of premium pay, awards, or buyout incentives.
Employer Contribution Limits
CSRS and FERS employees have different rules.
Civil Service Retirement System (CSRS)
There are no employer (federal government) contributions for CSRS employees.
Federal Employees Retirement System (FERS)
There are two types of employer (federal government) contributions for FERS employees:
the agency automatic contribution and
the agency matching contribution
Employer contributions are made each pay period (e.g. every two weeks).
Agency Automatic Contribution
Agency automatic contributions are equal to 1% of basic pay each pay period. It is in addition to the agency matching contributions.
Agency Matching Contribution
Agency matching contributions are made on the first 5% of basic pay contributed each pay period as follows:
100% matching (dollar-for-dollar) for the first 3% of basic pay contributed each pay period and
50% matching (50 cents on the dollar) for the next 2% of basic pay contributed each pay period
Vesting
For CSRS and FERS employees, employee contributions and earnings on the contributions are always vested and owned by the employees.
For FERS employees, agency matching contributions and the earnings on the contributions are always vested and owned by the employees. The agency automatic contributions and the earnings on the contributions are fully vested (owned) after three years of service (two years in some cases).
Beneficiary Designations
Legal and tax advice is useful when determining how to complete beneficiary designations. Properly completed designations can help save estate (death) tax, avoid probate, allow better income tax opportunities and avoid creditor claims on retirement assets.
Extra care needs to be taken in naming trusts as a beneficiary of most retirement assets in case of a death. Sometimes, naming trusts as a beneficiary can trigger income tax sooner than it would otherwise be owed and reduce the amount ultimately shielded from death tax.
Note that many plans require the participant’s spouse to be the beneficiary, unless the spouse provides written permission for another beneficiary to be named.
Creditor Protection
Retirement plans and accounts may have special creditor protection under federal and/or state laws. Different types of plans and accounts may have varying degrees of protection. State protection rules may also vary from state to state.
If you convert from one type of plan to another (e.g., from a traditional IRA to a Roth IRA), you may be changing how much protection you have. This may be also be the case if you move to another new state where the new state rules are different.
Consulting with an attorney for guidance on the creditor protection issue may be helpful.
Estate & Death Taxes
Retirement assets are added to your other assets and may be subject to federal and/or state death (estate) tax. It depends upon the size of your overall estate and the estate planning done for you. Consult with your advisor about ways to defer or avoid estate tax.
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Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.
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