Useful Information about the Thrift Savings Plan

Below is some information that is of interest to many investors in the Federal Government's Thrift Savings Plan. If you have other questions, please e-mail them to us (using the e-mail address on the home page) and we will try to find the answer and include it here. Please be advised that this information is our interpretation of the rules that govern TSP, but that we are not responsible for any errors that may exist. The rules, as you are painfully aware, are complex.  Our interpretations here are applicable for “most of us”.  However, your specific situation may be different. Before acting on this information, you should verify your specific situation with your human resource representative.

What exactly is the Thrift Savings Plan (TSP)?
The TSP is one of two parts (not including Social Security) of your Federal Government retirement. The first part of your Federal retirement is the monthly check you will receive after you retire from the government. This is called an annuity and the amount of your monthly check is calculated based on your years of service, retirement age,  salary, and whether you opt for the spousal benefit. You can go to our Calculators web page for an estimated calculation of your annuity. The second part of your retirement is the Thrift Savings Plan. The equivalent of the TSP in private industry is the 401(k). The Government's version of the 401(k), is the 403(b), which is what TSP is. You can contribute a portion of your earnings, before taxes, into your TSP account and your agency also contributes a portion of your salary to your account. The future value of your TSP account is determined by the returns of the funds that you are invested in. The more skillfully you invest, the more money you will have at retirement.

How much can I invest in the TSP?
FERS and CSRS employees can contribute up to $15,500 to TSP in 2008 (which is $596.15 per two-week pay period. This is the same limit as was in place in 2007. If you will be 50 or older in 2008, you can contribute an additional $5000 in "catch-up contributions". Uniformed Service Members can contribute above the $15,500 limit (up to $46,000 in 2008) from pay that is normally tax exempt such as "special pay" or pay while in a declared combat zone.

What happens if I contribute an amount that exceeds the IRS limit?
There is no penalty for over contributing. In fact, the Government won’t let you over contribute. Once you have contributed the limit, you payroll deductions for TSP will stop. However, when this happens, you will lose the Government's contributions for the rest of the year - because you will no longer be contributing. Therefore if you hit the IRS limit before the end of the year, you will be giving up free money (the Government's matching contributions).

What are catch-up contributions?
If you will be 50 years old or older in 2007 you can contribute an additional $5000 above the IRS limit mentioned in the previous paragraph. This amount is unchanged from 2006. You must, however, submit TSP Form TSP-1-C to make these catch-up contributions. The government does not match any portion of these catch-up contributions.

How often can I make an interfund transfer?
There is no limit to the number of interfund transfers you can make, other than you cannot make more that one transfer request per day. Note that one transfer request can consist of a transfer involving each of the five funds.

How long does it take for an interfund transfer to take effect?
TSP states that it can take “up to a few days” to execute an interfund transfer. However, typically an interfund transfer request submitted via the TSP web site by 10:00 am Central Time will be executed at the closing prices of that same day.

What does it cost me to execute an interfund transfer?
You will not directly pay any fees associated with making an interfund transfer. Although, actually, the trading costs incurred by the TSP are paid for out of the annual expenses of each of the TSP funds.

What are the annual expenses associated with each of the TSP funds?
The annual expenses for the funds vary by year but the expenses for the G and F-Funds are approximately 0.06% and the C, S, and I funds are approximately 0.07%. This expense ratio is much lower than the average no-load mutual fund expense ratios of 1.4% for a domestic stock fund, 1.1% for a domestic bond fund, and 1.9% for an international stock fund (source: Kiplingers.com) and are comparable to the expense rations of no-load index funds from Vanguard, T. Rowe Price, and the other large no-load fund families.

When can I get my money out of TSP?

While employed by the Federal government:

While you remain employed with the Federal Government you can make what is termed an “in-service withdrawal”. There are two types of In-service withdrawals: age-based, and financial hardship.

To be eligible to make an age-based withdrawal, you must be at least 59 ½ years old. Under an age-based withdrawal, you can withdraw all or part of your vested TSP balance, although you must withdraw at least $1000 (if your vested account total is less than $1000, then you must withdraw the entire balance). When you make an age-based withdrawal, you have several options on how to receive the money. The first is to direct TSP to transfer the withdrawal amount into a traditional Individual Retirement Account (IRA). Be advised that you cannot have the withdrawal money transferred into a Roth IRA, it must be transferred into a traditional IRA. The second option is to direct the TSP to transfer the money into an existing qualified eligible employee plan such as a 401(k) or 403(b) plan. The third option is to have the TSP send you a check. Unlike the first two options mentioned previously, it you have TSP send you a check, it is a taxable event in the eyes of the IRS and you will have to pay income taxes on the amount you an age-based withdraw, plus TSP will impose a 20% Federal income tax withholding.

Under the financial hardship withdrawal, you can only withdraw your contributions and earnings from those contributions. You cannot withdraw agency contributions or the earning from the agency contributions. The amount you can withdraw is limited to your financial need based on the following four conditions: negative monthly cash flow, medical expenses (including household improvements needed for medical care), personal casualty losses, or legal expenses for separation or divorce. The TSP will generally withhold 10% Federal income tax withholding (as you will pay income tax on the amount you withdraw). In addition, if you are under 59 ½, you will have to pay a 10% penalty for early withdrawal.

When no longer employed by the Federal government:

You can direct the TSP to transfer the withdrawal amount into a traditional Individual Retirement Account (IRA).

You can direct the TSP to send you a check, again subject to taxes and possible early withdrawal penalty mentioned above.

You also have the option of turning your TSP account into an annuity. What this means is that you can convert the value of your account into a monthly check, guaranteed for life (either your life of the life of the surviving spouse/other person with an insurable interest in you, depending on the options you select when you establish the annuity). Do not confuse this TSP annuity with the annuity portion of your FERS or CSRS retirement (the monthly check you will get if you qualify for retirement). This TSP annuity is totally independent of the FERS/CSRS annuity.

There are several options that can be selected that will affect the amount of your monthly check. The annuity monthly payout is essentially determined by your life expectancy (and your spouses/other person’s if you selected the joint option), and the annuity interest rate index (currently fixed by TSP at 4.625%) and is calculated to pay you all your money plus 4.625% earned exactly on the day your die, if you die at the expected date. If you and your spouse only live 10 years after retirement, then you lose and you won’t have gotten all your money and earnings back yet. If you and your spouse live to be 100, then you win because you will get all your money back, plus interest, plus more. One cautionary note about annuities is that when you (and your joint partner die if you selected the joint option) die, the annuity is over and there is no money from the annuity to be left to your heirs. The good thing about the annuity is that as long as you are around, the checks will keep coming. You won’t run out of money.

Are there funds that I can invest in outside of my TSP account that are equivalent to the five primary TSP funds?
Yes, most large mutual fund families have the equivalent of the TSP funds with the exception of the G-Fund. There is no equivalent of the G-Fund available outside of TSP. The following are the Fidelity, Vanguard and exchange traded funds that invest in the same index as the TSP funds:

TSP Fund  Fidelity Mutual fund
C-Fund      Spartan 500 Index Fund Investor Class (FSMKX)
S-Fund      Spartan Extended Market Index Fund - Investor Class (FSEMX)
I-Fund       Spartan International Index Fund - Investor Class (FSIIX)
F-Fund      Fidelity U.S. Bond Index Fund (FBIDX)

TSP Fund  Vanguard Mutual fund
C-Fund      Vanguard S&P 500 Index Fund (VFINX)
S-Fund      Vanguard Extended Market Index Fund (VEXMX)
I-Fund       Vanguard Developed Markets Index fund (VDMIX)
F-Fund      Vanguard Total Bond Market Index Fund (VBMFX)

TSP Fund  Exchange Traded Funds
C-Fund      SPDR S&P 500 Index Fund (SPY)
S-Fund      Vanguard Extended Market Viper (VXF)
I-Fund       MCSI EAFE INdex (EFA)
F-Fund      SPDR Lehman Aggregate Bond Fund (LAG)