Questions and Answers About the Thrift Savings Plan
By Douglas J. Gillert
American Forces Press Service
WASHINGTON, April 14, 1999 Twice a year, federal civilian employees can begin or change deposits into their Thrift Savings Plan account. "Open season" (May 15-July 31 and Nov. 15-Jan. 31) presents a palette of choices but almost always raises questions about the investment options.
Following are some commonly asked questions and answers about the Thrift Savings Plan that may help you make informed investment decisions. Before electing or changing Thrift Savings allotments, however, consult your local civilian personnel office. Information and forms also are available on the Internet at the Thrift Savings Plan Web site.
What is the Thrift Savings Plan?
The TSP is a tax-deferred savings plan for federal employees. Comparable to plans offered by private employers, the TSP offers participants tax-deferred advantages similar in many ways to those of individual retirement accounts.
How useful is the Thrift Savings Plan Web site in helping me determine how and how much to invest in it?
The Thrift Savings Plan Web site provides complete details on the plan, available investment funds, and how to borrow against your account balance. A "what if" calculator helps you determine what your investments could earn over a given period of time at any rate of return you assign.
You can download forms to elect or change participation in the plan -- you'll have to print them, fill them out and take them to your personnel office for processing, though.
Finally, TSP administrators assign each participant a Personal Identification Number. If you don't like the one they give you, you can ask for a custom one at the Web site. If you don't know your number, check a block at the site and it will be sent to you. Using your number at the site, you can access your personal TSP account and review your current balance, check the loan amount available to you and the current loan interest rate, review the status of any outstanding loan request, and request, change or cancel an interfund transfer.
Who is eligible to participate?
All federal employees.
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 to the TSP, as long as the annual total does not exceed annually adjusted Internal Revenue Service limits.
- All contributions must be made through payroll deductions. Contributions from other sources, such as personal savings, aren't permitted. You also can't transfer money to the TSP from an individual retirement account or any other retirement plan.
- You may contribute either a percentage of your basic pay each pay period or a fixed dollar amount.
- Elections are made during an open season to start, change or allocate TSP contributions. Although you may submit election forms anytime during an open season, contributions won't begin until the first full pay period that falls within the election period.
Who is entitled to agency contributions?
Only FERS employees. Agency contributions are not deducted from your pay nor do they increase your pay for income tax or Social Security purposes.
First, when you become eligible to participate in the TSP, your agency will open a TSP 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 TSP account, your agency makes matching contributions in addition to the automatic 1 percent. Matches apply to the first 5 percent of pay you contribute each pay period -- dollar for dollar for the first 3 percent and 50 cents on the dollar for the next 2 percent.
Although FERS employees may contribute up to 10 percent of their basic salary each pay period, agency contributions stop after the first 5 percent. However, contributions above 5 percent still provide before-tax savings and tax-deferred earnings.
Who pays administrative costs of operating the TSP?
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 noninvested agency automatic contributions and earnings on participant and agency contributions. FERS employees who leave federal service before they are vested in the TSP forfeit the 1 percent automatic agency contributions and earnings on those contributions.
Accrued administrative expenses, after forfeitures, are deducted from the earnings of the investment funds. Participants bear all investment management fees of the C stock fund and F bond fund. The thrift investment board provides annual financial statements detailing expense deductions with May participant statements.
The effect of net administrative expenses (after forfeitures) on the rates of return of the three funds is measured by the expense ratio of each fund. The monthly expense ratio is the total monthly administrative expenses charged to each fund, divided by the average fund balance during that month.
How do I change the way my existing account balance is invested?
If you want to change the way money already in your account is invested in the three TSP funds, you must submit an interfund transfer request form (TSP-30) to the TSP Service Office. However, it's more efficient and faster to make changes over the ThriftLine.
Choices you make on the election form (TSP-1) to allocate contributions only apply to future contributions to your account.
What is the ThriftLine?
The ThriftLine (1-504-255-8777) can be used anytime with a touch- tone phone. The line offers monthly rates of return for the three TSP funds as well as the most recent 12-month return rates.
If you are a TSP 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 TSP loans.
To use this automated service, you'll need your Social Security number and TSP 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 PIN containing four digits of your choice.
How do I start or change contributions to my TSP account?
Obtain an election form (TSP-1) 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 TSP contributions.
If you die, proceeds of your TSP 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 (TSP-3).
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 TSP-1 to stop or change the amount. You don't need to submit an election form each open season.
How are earnings allocated to TSP accounts?
Monthly earnings for each investment fund are calculated on month-end balances as of the end of the prior month, plus half the total contributions and loan repayments credited to accounts in the current month. (The prior month's end balance includes earnings as well as any loans, forfeitures, adjustments and interfund transfers processed in the current month.)
This method treats all contributions equally in the allocation of earnings, no matter when the month they were received by the TSP record keeper. If the record keeper receives a contribution after your pay date but processes it within the same month, the contribution still receives earnings for that month.
The "Summary of the Thrift Savings Plan for Federal Employees" and "Guide to TSP Investments" provide greater details. Both are available through the personnel office and on the Internet at www.tsp.gov.
Can I borrow from my TSP account?
If you have at least $1,000 of your own contributions (including associated earnings) in your TSP account, you may borrow for any purpose. If you want a residential loan, you will have to provide documentation. Residential loans can go up to 15 years; all other loans are for four years. Internal Revenue Service codes limit loan amounts, and the amount you borrow cannot exceed your TSP 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 TSP account.
What if there is an error in the contributions to my account?
Agencies must initiate corrections to TSP accounts. By law, agencies must make up earnings lost to accounts due to certain agency errors. However, they aren't required to make up lost earnings on contributions of your own money they may have failed to deduct from your pay.
If there's a mistake in your retirement coverage classification, you might not get money you're entitled to -- or receive money you're not entitled to. Contact your personnel office immediately if you think you've been misclassified.
How can I estimate my TSP account balance?
The size of 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 TSP account could be in the future, look at the following projections.
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 TSP 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 six-month period. Or call the TSP ThriftLine (1-504-255- 8777) anytime.
Review your leave and earnings statements and TSP participant statements to make sure the proper amounts are being contributed to your TSP accounts. Also verify the following information on the participant statement: Social Security number and birth date, which identify your account; the address where your participant statement and other TSP information is sent; retirement coverage (CSRS, FERS or other plan); and, if you're covered by FERS, your TSP 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 TSP account -- you will continue receiving semiannual participant statements. The TSP 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 TSP Service Office. Inform the office of any changes to your personal information, especially address changes.
How do I make or change my investment choices?
Both FERS and CSRS employees can choose the TSP funds they want to invest in. When you submit a TSP-1 election form, you can allocate any portion of future contributions among the three funds currently available.
How will I get up-to-date information about the performance of the TSP investment funds?
The "TSP Highlights" that accompanies your semiannual participant statement provides the most recent 10-year performance summary as well as monthly details of the TSP 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.
What are the advantages and risks of investing in the C and G funds?
The C fund allows broad participation in United States stock markets through a stock index such as Standard and Poor's 500. The shares of stock held by the index fund represent ownership shares in a variety of companies. The values of these shares can move up sharply with favorable changes in conditions affecting the economy, an industry or an individual company.
The G fund Treasury securities are guaranteed by the full faith and credit of the United States. Additionally, the Thrift Investment Board's policy of investing the G fund in short-term rather than longer-term securities minimizes the market risk.
The market risk is that Treasury and other fixed-income investments may fluctuate in value. The value decreases as the general level of interest rates in the economy rises, and increases when these rates fall. Market risk is much less for short-term investments such as those in the G fund than for longer-term investments such as the F fund offers.
What if I don't submit an election form?
If you're a FERS participant not contributing money to your TSP account and have not submitted an election form, your future 1 percent automatic agency contribution will be invested in the G fund until you submit a TSP-1 indicating an investment choice.
When I am rehired, do I need to submit a new election form?
What if I can only afford to contribute a small amount to my TSP account?
Assume you're a FERS employee who contributes just $10 per biweekly pay period for 20 years. In this example, that would be 1 percent of $26,000 annual salary. If your account grows at a rate of 7 percent, in 20 years your account balance will be $33,900.
Remember, the agency matches every dollar a FERS employee contributes up to 3 percent of basic pay, then 50 cents on the dollar for the next 2 percent the employee contributes. This is in addition to the 1 percent automatic agency contribution.
When can I start contributing to the TSP?
Eligible employees can sign up to contribute to the TSP only during one of the two open seasons each year: May 15-July 31 and Nov. 15-Jan. 31.
Newly hired FERS employees can start contributing to the TSP during the second open season following coverage by FERS. Rehired FERS or CSRS employees previously eligible to participate can sign up during the first open season after they are re-employed. Those not previously eligible have to wait until the second open season after they're rehired.
Rehired CSRS employees who choose to 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.
How do I stop contributing to the TSP?
You may stop contributing your own money to the TSP at any time by filling in the appropriate section of a TSP-1 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 TSP's tax advantages?
There are two tax advantages to the TSP: before-tax contributions and tax-deferred investment earnings.
With before-tax contributions, your contributions are subtracted from your pay before federal and, in almost all cases, state income taxes are calculated. By paying less current income tax, you have more take-home pay than if you had saved the money after it was taxed.
This way, you postpone paying taxes on the money you contribute until you withdraw these funds from your TSP account -- usually when you retire and when your tax bracket may be lower.
Your TSP contributions aren't reported as taxable income on the Form W-2 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.
Not only do you postpone paying taxes on your TSP contributions, the earnings on your account are tax-deferred too. This means you don't have to pay taxes on your TSP account earnings until you receive the money.