Questions and Answers About the Thrift Savings Plan
By Douglas J. Gillert
American Forces Press Service
WASHINGTON, Nov. 8, 1996 Twice a year, federal civilian employees can begin or change deposits into their Thrift Savings Plan account. Open seasons (May 15July 31 and Nov. 15Jan. 31) present a pallet of choices but almost always raise questions about the investment options.
Following are some commonly asked questions and answers about the Thrift Savings Plan. Officials hope these questions and answers will help you make informed investment decisions. Before electing or changing Thrift Savings allotments, however, consult your civilian personnel office. Keep this in mind, as well: Stock and bond fund contributions and earnings are not insured against loss in any way, and no fund guarantees any rate of return over a long haul. The bigger the potential payoff, the higher the risk of losses.
What is the Thrift Savings Plan?
The Thrift Savings Plan is a taxdeferred savings plan for federal employees. Comparable to plans offered by private employers, the Thrift Savings Plan offers taxdeferred advantages similar in many ways to those of individual retirement accounts.
Who is eligible to participate?
All federal employees.
When can I start contributing to the Thrift Savings Plan?
Newly hired Federal Employee Retirement System employees can start contributing to the plan during the second open season following the start of their employment.
Rehired FERS or Civil Service Retirement System employees previously eligible to participate can sign up during the first open season after they are reemployed. Those not previously eligible have to wait until the second open season after they're rehired.
Rehired CSRS employees who change to FERS coverage begin receiving 1 percent automatic agency contributions immediately upon transfer. They then can elect additional participation within 30 days or wait until the next open season.
Eligible employees can sign up to contribute to the Thrift Savings Plan only during one of the two open seasons each year: May 15July 31 and Nov. 15Jan. 31. What are the basic rules for contributing?
- Civil Service Retirement System employees may contribute up to 5 percent of their basic pay each pay period.
- Federal Employee Retirement System employees may contribute up to 10 percent of their basic pay each pay period, up to a limit adjusted annually by the Internal Revenue Service.
- All contributions must be made through payroll deductions. Lumpsum contributions from a source other than payroll deductions (personal savings, for example) aren't permitted. You can't transfer money to the Thrift Savings Plan from an individual retirement account or any other retirement plan.
- o You may contribute either a percentage of your basic pay each pay period or a fixed dollar amount (not exceeding the percentage limit).
- Elections are made during an open season to start, change or allocate future Thrift Savings Plan contributions.Who is entitled to agency contributions?
Only FERS employees. These contributions are not taken out of your pay, nor do they increase your pay for income tax or Social Security purposes.
First, when you become eligible to participate in the Thrift Savings Plan, your agency will open an account for you and automatically contribute 1 percent of your basic pay for each pay period. You will receive these contributions whether or not you contribute your own money.
Second, when you contribute to your account, your agency makes matching contributions in addition to the 1 percent automatic contribution. Matches apply to the first 5 percent of pay you contribute each pay period. Contributions are matched dollar for dollar for the first 3 percent and 50 cents on the dollar for the next 2 percent. The remaining 5 percent of pay FERS employees may contribute goes unmatched, but is still fully taxdeferred and sheltered.Who pays administrative costs of operating the Thrift Savings Plan?
The plan's major expenses include development and operating costs of the record keeper's computer system and printing and mailing publications and participant statements. There are two sources: forfeiture of nonvested agency automatic contributions, and earnings on participant and agency contributions. FERS employees who leave federal service before they are vested in the plan forfeit the 1 percent automatic agency contributions and earnings on those contributions.
Accrued administrative expenses, after forfeitures, are deducted from the investment fund earnings. Participants bear all the fees associated with the C and F funds. The thrift investment board reports annual expense details with May participant statements.How do I start or change contributions to my Thrift Savings Plan account?
Obtain an election form (TSP1) from your civilian personnel office. Use the form to show whether you want to contribute a percentage of basic pay or a fixed amount each pay period. Also use an election form to change the amount of your contributions.
If you die, proceeds of your account go, by statutory order of precedence, first to your surviving spouse, then children, then parents. If you want somebody else to receive the money, you must complete a designation of beneficiary form (TSP3).
If you submit your form before January or July, your choices become effective the first full period in January or July. If you submit the form during either of these months, your choices take effect the first pay period that begins on the date your employing office accepts the form.
Your agency deducts the amount you choose from each pay period and continues doing so until you submit another TSP1 to stop or change the amount. You don't need to submit an election form each open season.How do I make or change my investment choices?
Both FERS and CSRS employees can choose the Thrift Savings Plan funds they want to invest in. When you submit a TSP1 election form, you can allocate any portion of future contributions among the three funds currently available.How do I change the way my existing account balance is invested?
You change the way money already in your account is invested in the three Thrift Savings Plan funds by submitting an interfund transfer request form (TSP30) to the Thrift Savings Plan Service Office. However, it's more efficient and faster to make changes over the ThriftLine.What is the ThriftLine?
The New Orleansbased ThriftLine ( 2558777) can be used anytime with a touchtone phone. The line offers monthly rates of return for the three Thrift Savings Plan funds as well as the most recent 12month return rates.
If you are a Thrift Savings Plan participant, you also can use the ThriftLine to obtain information about your account. In addition, if you have ever invested in the C or F funds, you can use the ThriftLine to change how much you allocate to each fund.
If you have contributed your own money to the account and are still a federal employee, the ThriftLine can tell you how much you may be eligible to borrow and the current interest rate for Thrift Savings Plan loans.
To use this automated service, you'll need your Social Security number and Thrift Savings Plan Personal Identification Number, included in welcoming letters to new contributors. If you don't know your PIN, you can request a new one be mailed to you. You also can ask the ThriftLine for a new fourdigit number of your choice.Can I borrow from my Thrift Savings Plan account?
If at least $1,000 in your Thrift Savings Plan account is from your own contributions and associated earnings, you may borrow for any purpose on a fouryear term. If you provide documentation, a residential loan can go up to 15 years. Internal Revenue Service codes limit loan amounts, and the amount you borrow cannot exceed your account balance.
You pay interest on the loan at the G fund rate in effect at the time your application is received. The rate is fixed for the life of the loan, and both the principal and interest you pay will go back into your own account. Because you get the interest back, you cannot claim it as a tax deduction.How will I get uptodate information about the performance of the Thrift Savings Plan investment funds?
The "TSP Highlights" newsletter that accompanies your semiannual participant statement provides the most recent 10year performance summary as well as monthly details of the Thrift Savings Plan funds and related securities and indexes. In addition, the Thrift Investment Board publishes a monthly fact sheet, "C, F and G Fund Monthly Returns," that you can obtain from personnel and payroll offices.How can I estimate my Thrift Savings Plan account balance?
Your account balance depends on how much you (and your agency, if you're a FERS employee) contributed to your account, and investment earnings. To get an idea of what your account could be in the future, look at the following projections, but keep in mind this is only an example the figures do not consider costofliving increases or promotions, which would certainly impact earnings
Assume you're a FERS employee earning $26,000 a year with no future salary increases. You choose to save 5 percent of basic pay each pay period and thus receive total agency contributions of 5 percent. The growth projections below are for three sample annual rates of return on your investments: 4 percent, 7 percent and 10 percent.
Account Balance at Assumed Annual Rates of Return
How will I find out about my account balance?
In late May and late November, the Thrift Savings Plan record keeper will mail you a statement with information about your balance and a detailed summary of the activity in your account during the previous sixmonth period. Or call the Thrift Savings Plan ThriftLine ( 2558777) anytime.
Review your leave and earnings statements and Thrift Savings Plan participant statements to make sure the proper amounts are being contributed to your accounts. Also verify the following information on the participant statement:
q Social Security number and birth date, which identify your account;
q The address where your participant statement and other Thrift Savings Plan information is sent;
q Retirement coverage (CSRS, FERS or other plan); and,
q If you're covered by FERS, your Thrift Savings Plan service computation date and vesting code, which affect your vesting in the 1 percent automatic agency contributions.
If there are any mistakes, report them to your personnel office.
After you leave federal service and until you withdraw your Thrift Savings Plan account you will continue receiving semiannual participant statements. The Thrift Savings Plan Service Office in New Orleans becomes your primary contact for account information, including procedures to withdraw it. Participant statements of retired or separated employees contain the address and telephone number of the Thrift Savings Plan Service Office. Inform the office of any changes to your personal information, especially address changes.What are the advantages and risks of investing in the C and G funds?
G fund investors' contributions and earnings are safe from loss because the underlying Treasury securities are guaranteed by the full faith and credit of the United States.
The C fund allows broad participation in U.S. stock markets through a stock index such as Standard and Poor's 500. Shares held by the stock fund represent ownership shares in a variety of companies, and their values rise and fall with market changes. The fund's rate of return in 1995 was over 35 percent in 1994, however, it was less than 2 percent, several points below supersafe G fund earnings.What if I don't submit an election form?
If you're a FERS employee not contributing money to your Thrift Savings Plan account and you have not submitted an election form, your 1 percent automatic agency contributions are invested in the G fund until you submit a TSP1 indicating an investment choice.When I am rehired, do I need to submit a new election form?
Yes.What if I can afford to contribute only a small amount to my Thrift Savings Plan account?
Remember, the government matches every dollar up to 3 percent of basic pay a FERS employee contributes and 50 cents on the dollar on the next 2 percent. This is in addition to the 1 percent automatic agency contribution. Contributions of just $10 per pay period that earn 7 percent over 20 years would create an account balance of about $34,000.How do I stop contributing to the Thrift Savings Plan?
You may stop contributing your own money to the Thrift Savings Plan at any time by filling in the appropriate section of a TSP1 election form. If you stop contributing during an open season, you must wait until the next open season to start again. If you stop between open seasons, you must wait two open seasons to begin again.What are Thrift Savings Plan's tax advantages?
There are two tax advantages to the Thrift Savings Plan: beforetax contributions and taxdeferred investment earnings.
The money you contribute to the plan is taken out of your pay before federal and, in almost all cases, state income taxes are calculated. Because you pay less current income tax, you have more takehome pay than you would if you paid taxes first and then invested. Further, income taxes on your contributions, agency matching funds and all earnings are postponed until you withdraw them from your account usually when you retire and your tax bracket may be lower.
Your contributions aren't reported as taxable income on the Form W2 you receive from your agency each year. This means you don't have to report them on your annual tax return. This special tax treatment doesn't affect your salary of record for other federal benefits such as the FERS basic annuity or CSRS annuity or life insurance. It also doesn't affect Social Security taxes or benefits, because they are based on your unreduced salary.