Common Thrift Savings Plan Misconceptions by Dave Baker

David Baker
July 15, 2017

Common Thrift Savings Plan Misconceptions

by Dave Baker

David Baker has more than two decades of experience, and as the founder of Retirement Income and Benefits Solutions, is dedicated to helping clients achieve a higher level of confidence in their financial plan. Here Dave Baker will cover the topic of TSP and common misconceptions about the plan.

When it comes to federal retirement, confusing policies and rules have created some Thrift Savings Plan misconceptions. Over the years, it seems as though the lines have blurred a little and a number of TSP misconceptions seen have only increased. In our experience, three main myths should be debunked so this is what we plan to do today. By the end, we hope to have cleared any issues or confusion you may have had!

10% Early Withdrawal Fee
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For some time, it has been thought you would be subject to a 10% penalty for making a TSP withdrawal before age of 59 1/2; since this guide is all about myths, we are sure you have guessed this is not entirely true. In fact, there is no fee as an employee if you separate and withdraw in the year you turn 55 years of age; in some special categories, this reduces to 50 years. Unfortunately, people seem to get the TSP confused with Individual Retirement Accounts (IRAs) as the latter does charge penalties for early withdrawal before 59 1/2.

As you may have seen, there can be an early TSP withdrawal fee involved, but it is for those who separate before the year of their 55th birthday (50 for those in the special category). This being said, even avoiding this penalty is common as long as you follow a life expectancy based withdrawal technique (commonly called a 72(t) distribution); this needs to be until you reach 59 1/2 or for five years depending on which is longer.

Roth and Traditional TSPs

Next up, many believe Traditional, and Roth TSPs are separated completely and therefore provide two different accounts. Once again, this is not true; although they show as two different balances, they belong to one single TSP account. For many, this causes issues because withdrawals need to be made proportionally whenever an account holds Traditional (pre-tax) and Roth (post-tax) balances. Unfortunately, withdrawing from just one of the two is not an option.

IRA Contributions

Finally, can you contribute to an IRA as well as fully funding the TSP? In short, yes. In premise, IRAs and TSPs are the same because they allow you to save for retirement but in reality, they are entirely different from one another since only one is sponsored by your employer – an IRA is an individual plan. If you have previously given into this misconception and failed to invest in an IRA, you could have been putting away an extra $5,500 every single year. With this in mind, absolutely anyone can put money into a Traditional Non-Deductible IRA with the restrictions in place on deducting contributions to a Traditional IRA and even Roth IRA contributions full-stop.

For us, these are three huge misconceptions, and they have the potential to change the way in which you invest and keep your money. Therefore, feel free to share this information around to your colleagues, and all other federal employees and hopefully we can reduce the number of Thrift Savings Plan Misconceptions that exist.