2012 Federal Employees Almanac
Chapter 6, Section 1: General TSP Rules and Procedures
- By Almanac Staff
- February 19, 2012
Investments, Matches, and Limits
Employees may invest in the Thrift Savings Plan (TSP) on a pay-period basis either in percentage-of-salary amounts or whole dollar amounts, up to an annual dollar maximum--called the elective deferral limit--set by the IRS for tax-advantaged retirement savings plans ($17,000 in 2012).
Employees covered by the Civil Service Retirement System (CSRS) get no government contributions. For Federal Employees Retirement System (FERS)-covered employees, the employing agency establishes a TSP account and makes an automatic contribution equal to 1 percent of salary, whether or not the employees invest their own money. For FERS employees who do invest their own money, investments are matched dollar for dollar for the first 3 percent of pay invested per pay period, and then 50 cents on the dollar for the next 2 percent of pay invested per pay period. Thus the maximum government contribution for FERS employees is equal to 5 percent of salary.
Automatic contributions of 1 percent of salary begin immediately upon hiring, and matching contributions begin as soon as employees start making investments from their own money. Newly hired employees whose first pay period started August 1, 2010, or after (as well as previously hired employees who have a break in service of more than 30 days and then return to the government) begin with a default personal investment rate immediately upon hiring of 3 percent. However, they may choose a different investment level or may opt out entirely, with the option to begin making personal investments later.
Those choosing to opt out have 90 days from starting on the job to request a refund of money they did not wish to have withheld, by filing Form TSP-25, Automatic Enrollment Refund Request. No notice to or consent by a spouse is required. Those refund payments reflect any gains or losses through the date of the distribution and are taxable but not subject to an early withdrawal penalty tax. Automatic agency contributions remain in the account but matching contributions associated with the mandatory employee contribution are forfeited. Beyond the 90-day period, the participant may make a withdrawal only under standard withdrawal rules as described in Sections 3 and 4 in this chapter.
Automatic investments are put in the G Fund unless the individual chooses a different allocation. See Section 2 in this chapter for information about the investment funds.
The employee automatic investment policy does not affect people on the job before the effective date (unless they have a break in service as described above); if they are not investing their own money, they must opt in. Matching contributions are not made until they do so, although they receive the 1 percent agency automatic contribution in any case.
FERS employees must take the elective deferral limit into account when planning their investments. Once the dollar cap is reached for a year, employee investments are shut off--as are the agency matching (although not automatic) contributions. Thus, in order to receive the maximum agency matching contributions, FERS employees need to make sure they are able to continue investing at least 5 percent of salary through every pay period of the calendar year.
That consideration does not apply to CSRS employees because they receive no government contributions.
Investments in a TSP account generally can come only from payroll deductions; therefore, money in an IRA generally cannot be rolled over to a TSP account. The exception is transfers into the TSP from 401(k) and similar plans of prior employers and from conduit IRAs holding proceeds of such plans, as described below in Transfers into the TSP. Such transfers do not count against the dollar limit, nor do government contributions for FERS investors or "catch-up" investments (see Catch-Up Contributions, below).
Lump-sum investments--other than transfers and rollovers--are not permitted. That means that TSP investments cannot be deducted from payments that are not considered part of basic pay, such as voluntary separation incentive payments (buyouts), bonuses, or payments for the value of unused annual leave at separation for retirement or other purposes.
If investments are made on behalf of a participant in excess of the annual dollar limit, the TSP refunds the excess and any associated earnings to the participant early in the succeeding calendar year. Any excess investment must be reported as income earned for the calendar year in which the investment was made to the TSP. The associated earnings must be reported as income for the year they are disbursed to the participant.
Employees participating in the TSP remain eligible to invest in an IRA. However, CSRS and FERS are considered to be retirement plans for the limits on tax deductibility of IRA investments by higher-income people enrolled in retirement plans. Check with a tax adviser.
While retirees and other separated participants may leave their accounts open and continue to transfer money among the investment funds, they may not make further investments.
Starting, Changing, Reallocating, and Stopping Investments
Eligible employees not already enrolled may join the program by filing a Form TSP-1, Election Form, with their employing agency personnel or benefits office (many agencies provide this service electronically; check with the human resources and/or finance offices). This can be done at any time with the exception that there is a six-month waiting period before an employee may restart investments after taking out a financial hardship in-service withdrawal. The TSP offers the choice of investing by percentage of salary or by dollar amount per pay period. All contributions will be automatically invested in the government securities (G) Fund unless and until the investor chooses a different allocation and acknowledges the investment risk of doing so.
Participants may change the amounts of their ongoing investments at any time by filing a new Form TSP-1 or its electronic equivalent.
Investors may reallocate ongoing investments among the available TSP funds by using the ThriftLine phone system (from the United States and Canada toll-free (877) 968-3778, TDD (877) 847-4385; other callers (404) 233-4400) or by using the TSP Web site, www.tsp.gov. In some cases, automated systems operated by employing agencies also can be used.
There is no limit on the number of reallocation requests allowed for ongoing investments.
Employees may stop investing in the TSP at any time by filing a new Form TSP-1 or its electronic equivalent, with no restriction on when they may restart investing, other than being subject to the six-month waiting period after in-service financial hardship withdrawals, if applicable.
Investment of new money stops at separation, although separated participants can keep their accounts open and can reallocate their money among the funds.
In addition to reallocating ongoing investments, investors may transfer money already in their accounts among funds. This applies both to actively employed investors and those retired or otherwise separated.
Rules at 5 CFR 1601.32 limit the number of times per month that an investor may use interfund transfers. After an investor has made two interfund transfers in a month, the participant may make additional interfund transfers only to move money into the government securities (G) fund until the first day of the next calendar month. The dates used for this purpose are the processing dates of the transactions, not the request dates. If a first or second interfund transfer in a month moves money only into the G Fund, it still counts as one of the two unrestricted transfers for that month.
Investors may make interfund transfers by using the ThriftLine phone system (from the United States and Canada toll-free (877) 968-3778, TDD (877) 847-4385; other callers (404) 233-4400) or by using the TSP Web site, www.tsp.gov. Transfer requests must be received by the TSP by noon Eastern time in order to be effective at the end of that day and at the day's closing prices for the investment funds. Otherwise, the transaction will occur at the end of the following business day at that day's closing prices.
You can specify the percentage of your total account balance that you want to have invested in each fund after the transfer is completed. Percentages can be stated in 1 percent increments and must add up to 100 percent.
Investors who have not previously invested outside the government securities (G) fund must sign a statement acknowledging risk before moving money into any of the other funds.
Valuation of Accounts
At the end of each business day, the TSP conducts a valuation of accounts. Accountings include any new investments made by actively employed investors, any government contributions for FERS investors, any loan or withdrawal activity, interfund transfers, and the changes in the value of the funds themselves due to investment earnings or losses. Balances are shown as shares and share prices as well as in dollar amounts.
Vesting requirements apply only to FERS participants. If you are a FERS participant, you must work for the federal government for a certain number of years to be entitled to (or "vested" in) the agency's automatic 1 percent contributions in your account and the earnings on those contributions. You are immediately vested in your own contributions (including any catch-up contributions; see below) and any matching contributions, and any earnings they accrue.
Most FERS employees become vested in the automatic contributions and the earnings on them after three years of federal civilian service. FERS employees in congressional and certain non-career positions become vested after two years. If you leave government service before meeting the vesting requirement for your automatic contributions, those contributions and their earnings will be removed from your account and forfeited to the TSP. If you die before separating from service, you automatically become vested in all the money in your TSP account.
CSRS participants receive no agency contributions, so they always are vested in all the money in their accounts.
Tax Status of Investments
An employee's own contributions to the TSP reduce the worker's taxable current income. In effect, an employee's contributions reduce the individual's gross salary for federal income tax purposes. For example, if employees who have a $60,000 salary invest 5 percent of their pay ($3,000) in the TSP, their gross income is reduced to $57,000 for federal income tax purposes. Most state and local governments apply the same rule. Check with your state and local government taxing authorities.
However, Social Security taxes, for FERS employees, CSRS Offset employees and others subject to Social Security taxes, are applied to an employee's total salary. Thus, in the example above, Social Security tax would be applied to the $60,000 base salary.
All agency contributions and earnings in participant accounts are sheltered from taxes until withdrawn.
Upon withdrawal, the amount paid to an employee is subject to different tax rules depending upon how the account is withdrawn. You must treat taxable amounts paid to you from your TSP account as taxable income for federal income tax purposes in the year in which such payments are made. TSP annuity purchases and direct transfers by the TSP to other eligible plans are not payments made directly to you and are not subject to these rules. See Taxation of Withdrawals in Section 4 of this chapter.
The tax law contains complex rules for the payment of federal income tax and tax withholding on payments from plans such as the TSP. See Section 7 in this chapter for tax-related TSP forms and publications.
Public Law 111-31 of 2009 required the TSP to offer a Roth investment option, in which investments are made with after-tax dollars and withdrawals of those funds, along with associated earnings, are tax-free. This change was ordered on grounds that such options had become increasingly common in similar other employer-sponsored retirement savings plans.
Many details of how the option will operate remained to be determined as of the publication of this edition of the Federal Employees Almanac, although the TSP had announced that the Roth option was to be available in the second calendar quarter of 2012 and that the following policies would apply.
A participant may designate any whole percentage or dollar amount of basic pay as Roth investments, using Form TSP-1 or its electronic equivalent. This election may be in addition to or in lieu of an election to make regular, tax-deferred contributions. The combined amount an investor may put in a traditional TSP account and a Roth TSP account during a year cannot exceed the IRS-set elective deferral limit.
Roth-status catch-up contributions will be allowed (see below).
Roth investments and non-Roth investments will be combined for determining the employee's percentage of salary invested for purposes of matching contributions. All agency contributions and their associated earnings are on a tax-deferred basis, even if the employee is making Roth investments from personal money.
Newly hired employees who are automatically enrolled with default investments will have those investments made in the form of regular investments unless they elect to make Roth investments. Existing employees who do not designate all or a portion of their investments as Roth investments will continue to make their investments under tax-deferred status.
Money can be recharacterized if an employing agency errs in designating the status of an employee investment.
If a participant takes a financial hardship in-service withdrawal, all investments--both regular and Roth and including catch-up contributions--are subject to a six-month waiting period before new investments can be made again.
The law does not allow conversions of existing TSP regular balances to Roth status. However, it does allow separated participants who are over age 59 1/2 to withdraw TSP regular balances and transfer them to a Roth-status account such as a Roth IRA. Those participants must pay tax on the amount transferred for the year of the transfer.
Separated participants are subject to required withdrawals of both regular and Roth investments as described in Section 5 of this chapter.
Public Law 107-304 permits eligible TSP participants to make additional investments from their basic pay to their TSP accounts for each year in which they are age 50 or older. These investments, commonly called catch-up contributions, are a supplement to the participant's regular employee investments and do not count against the Internal Revenue Code's elective deferral limit. However, catch-ups have their own annual limits and eligibility criteria.
A participant is eligible to make catch-up contributions if all of the following conditions are met:
- He or she is in pay status. Because these contributions are made by payroll deductions, participants must be currently employed and receiving pay. They cannot be retired or otherwise separated from service or in non-pay status such as on leave without pay.
- He or she is investing a biweekly amount which will result in his or her reaching the elective deferral limit by the end of the relevant year.
- He or she is at least 50 years old by the end of that year.
- He or she is not in the six-month non-contribution period following the receipt of a financial hardship in-service withdrawal.
The maximum amount is $5,500 in 2012. Agencies are responsible for ensuring that they do not submit catch-up contributions for their participants which exceed the yearly catch-up limit. The TSP will reject any amounts that exceed the yearly limit.
Like regular investments, catch-up contributions are made on a pretax basis unless the participant makes them with after-tax money as Roth status (see Roth Accounts, above). The catch-up dollar limit applies to the combined amount of regular and Roth investments, for those making both types of investments.
There are no agency contributions associated with catch-up contributions.
Elections for catch-up contributions are separate from the participant's election for regular employee investments. The participant can make a catch-up contribution election at any time beginning in or after the year in which he or she turns age 50 by filing Form TSP-1-C, Catch-Up Contribution Election, or its electronic equivalent.
Catch-Up contribution elections are made in terms of a requested whole dollar amount deducted from the participant's basic pay each pay period until the earliest of the following occurs:
- the annual catch-up limit is reached;
- the calendar year ends; or
- the participant elects to stop the contribution.
The participant can elect any whole dollar amount up to the yearly limit. However, catch-up contributions for one year don't continue into the following year (except in cases of error correction). The participant must make a new election each year.
More than one election may be made in any given year so long as the annual catch-up limit is not exceeded. Participants can make catch-up contribution elections at any time during the year. Elections are effective no later than the first full pay period following the agency's receipt of the election. The election terminates with the last pay date of the year to which it applies.
If a participant enters non-pay status during the year, the catch-up contributions (like regular investments) will stop. When the participant returns to pay status, he or she cannot make up the missed payments, but can submit a new election increasing the catch-up contribution amount and make the maximum catch-up contribution allowed by law for that year.
If a participant is currently investing in both civilian and uniformed services TSP accounts, he or she can make separate catch-up contributions to each account so long as the total for both accounts combined does not exceed the annual catch-up limit. Catch-Up contributions into a uniformed services account cannot be made from combat zone, incentive or special pay.
Participants may stop or restart their catch-up contributions at any time without penalty. The termination of catch-up contributions does not affect the participant's regular investments.
If a participant stops his or her regular employee investments, the catch-up contributions also stop. If the participant receives a financial hardship in-service withdrawal, his or her catch-up contributions stop along with any regular employee investments.
Catch-Up contributions are invested in the participant's account based on the current investment allocation.
Transfers into the TSP
Transfers are allowed into the TSP from 401(k) and similar plans of prior employers. The policy further allows transfers from individual retirement accounts established to hold such money from such accounts after leaving non-federal employment, but does not allow transfers into the TSP from funds in other types of IRAs.
A TSP participant who would like to transfer money into the TSP should check with a representative of his or her former plan or IRA to ensure that the distribution is considered an eligible rollover distribution. For purposes of these transactions, there is a distinction between a transfer and a rollover. A transfer occurs when the participant instructs the qualified retirement plan or conduit IRA to send all or part of his or her eligible distribution directly to the TSP instead of issuing it to the participant. A rollover occurs when the qualified retirement plan or IRA makes a distribution to the participant (after withholding the mandatory 20 percent federal income tax) and the participant deposits all or any part of the gross amount of the distribution into the TSP within 60 days after receiving it.
The TSP can accept a transfer from:
A qualified retirement plan. This is either a qualified trust described in Section 401(a) of the Internal Revenue Code (IRC) which is tax exempt under IRC 501(a) or an IRC 403(a) annuity plan. A qualified retirement plan generally includes defined contribution plans such as money purchase plans, profit sharing plans, employee stock ownership plans, stock bonus plans and other plans that have provisions for cash or deferred arrangements under section 401(k) of the IRC and may include a distribution from a qualified benefit plan.
A conduit IRA. This is an individual retirement account described in IRC 408(a) or an individual retirement annuity described in IRC 408(b) that contains only funds transferred or rolled over from a qualified retirement plan and earnings on those amounts. Thus, it cannot contain funds contributed to it directly by the participant. Consequently, an IRA will not qualify as a conduit IRA if the participant has mixed regular contributions or funds from other sources with the rollover distribution from the retirement plan.
The TSP can accept a rollover from the participant. A rollover can only be accepted within 60 calendar days of the date the participant received the eligible rollover distribution from a qualified plan or conduit IRA. The rollover must be in guaranteed funds made payable to the TSP.
Money rolled over or transferred into the TSP is allocated according to the participant's most current contribution allocation. It becomes part of the TSP employee contributions and will be subject to the same plan rules as all other employee contributions into the account. The money does not count against the annual dollar cap on regular employee contributions.
Military Reserve TSP Accounts
Under P.L. 106–65, members of the Ready Reserve or National Guard of the Army, Navy, Air Force, Marine Corps, Coast Guard, Public Health Service, and the National Oceanic and Atmospheric Administration in any military pay status (as well as regular active duty members of those services) can contribute to the TSP. Such accounts must be established by submitting to the applicable service a separate election form called the TSP-U-1.
If you had a TSP loan that was closed as a taxable distribution because you separated or were placed in non-pay status to perform military service, you may be eligible to have the taxable distribution reversed after you return to civilian service or pay status. If you also received an automatic cashout of your TSP account when you separated, you must return the cashout to be eligible for a reversal of the taxable distribution of your loan. However, if you voluntarily withdrew your TSP account when you separated, you are not eligible to have the taxable distribution of your loan reversed. To reverse the taxable distribution, you may either repay the full amount of the taxable distribution or you may reinstate a loan payment schedule if the reinstatement is permitted within the established limits of the loan program. The maximum time frame for repayment of your loan will be extended by your period of military service. To exercise this opportunity, you must notify the TSP within 90 days of the date of your return to civilian service or pay status.
Federal and postal employees who are Reservists can have both a civilian TSP account and a uniformed services TSP account. When civilian federal employees enter military active duty, they cannot make any contributions to their civilian TSP accounts while on leave without pay or separated from the civilian position. As active duty service members, though, they can contribute to a military TSP account; check with your military service regarding the availability of matching contributions from it.
Those with two accounts have their accounts treated separately for some purposes but collectively for others. For example, to move money between funds, investors must submit two interfund transfer requests, one for each account. However, the accounts are combined for the tax code limit on annual investments (see Investments, Matches, and Limits, above) and in determining the amount the participant is eligible to borrow from the TSP.
Members of the uniformed services have access to the TSP loan program. However, Reservists who drill only monthly should think seriously before taking a loan from their military accounts because they may be unable to repay the loan in the time frame required by law. Employees are prohibited from repaying a uniformed services TSP loan from civilian pay, or vice versa.
Only pay for active military service can be invested in a military TSP account. Reservists may be able to contribute all or any whole percentage of any special or incentive pay (including re-enlistment or other bonuses) received, up to the tax code dollar limit. To contribute from military special pay, incentive pay, or bonuses, the participant must be contributing from military basic pay.
Investments from tax-exempt pay such as combat zone pay are not subject to the elective deferral limit, although they are subject to a separate provision of the tax code called the Section 405(c) limit ($50,000 in 2012). Any earnings attributable to those investments will be taxable upon withdrawal.
Once an employee separates from either the uniformed services or federal civilian service, the employee may combine the accounts.
Catch-Up Contributions for Reservists
Employees who perform uniformed service and then later are restored to their civilian positions may make up any investments to a civilian Thrift Savings Plan account they missed because of the military service. The amount is determined by using the TSP election in effect immediately before entry into military service, unless the employee submitted a new Form TSP-1 or equivalent to terminate the investments or made a new election during military service. The amount of money they can retroactively invest in their civilian accounts will be offset by any investments they made to a uniformed services TSP account while on active duty.
Both makeup and current investments are invested in the funds requested on the current Form TSP-1 or equivalent. All makeups must be deducted from future pay.
Those in the FERS will receive retroactive agency matching contributions as they make up their employee investments. FERS participants receive agency automatic (1 percent of salary) contributions regardless of whether they make up employee investments. Retroactive earnings are credited on retroactive agency contributions but not on makeup employee investments.
There are several ways to access information regarding a TSP account. The TSP ThriftLine (from the United States and Canada toll-free (877) 968-3778, TDD (877) 847-4385; other callers (404) 233-4400), is an automated telephone service that is available 24 hours a day, seven days a week from touch-tone phones (callers may opt out of the automated system to speak to a customer service representative during business hours). The TSP Web site (www.tsp.gov) also offers account holders information of a general and specific nature. For certain services, callers or visitors must have their personal identification number (PIN) and Social Security number.
On both the ThriftLine and Web site you may: make an interfund transfer, change or request personal identification number, check on status of loan or withdrawal request, determine current account balance and amount available for loan, allocate future contributions, check the status of an outstanding loan, and obtain a loan prepayment amount.
The TSP also issues quarterly account statements for the periods ending March 31, June 30, September 30, and December 31 containing a detailed summary of the activity in the account, including any loan activity, as well as an annual statement early in each calendar year.
For current employees, the primary contact for TSP information is the agency personnel office. However, the TSP Service Office handles questions about loans, contribution allocations, interfund transfers, designations of beneficiaries, and withdrawals for all participants.
The Service Office is the primary contact for participants who have left federal service. It can answer questions about accounts and send TSP withdrawal materials to supplement the withdrawal package provided by agencies upon separation from federal service. Submit withdrawal forms directly to the Service Office.
The Service Office's hours of operation are 7 a.m. to 9 p.m. Eastern time on business days. Phone the ThriftLine numbers above, fax (866) 817-5023, or write to Thrift Savings Plan Service Office, P.O. Box 385021, Birmingham, AL 35238.
See Section 7 in this chapter for points of contact for other TSP services.
Federal Retirement Thrift Investment Board
The TSP is managed by an independent federal agency--the Federal Retirement Thrift Investment Board. The Board consists of five members who serve in a part-time capacity. They are nominated by the President and confirmed by the Senate. The agency is administered by a full-time executive director, currently Gregory Long, appointed by the Board.
Board operations are funded first by forfeiture of the agency's automatic 1 percent account contributions by FERS employees who separate before they are vested in those contributions. If these forfeitures are not sufficient to pay the Board's expenses, then the Board pays its remaining administrative expenses from earnings on all participant and agency contributions.