TSP fees: Don’t make a $78,000 mistake | Federal News Network (2024)

FAQs

What are the fees charged by the TSP? ›

Fees. While they may not have as many funds to choose from, TSP participants do have one big advantage over most 401(k) investors: lower fees. The total expense ratio, which covers both investment and administrative fees, is 0.066% for individual TSP funds.

The TSP's performance in April 2022 reflected the worst showing for the stock market and most of the funds in the Thrift Savings Plan (TSP) in months. Inflation, the Russia/Ukraine war, and a general negative sentiment about the direction of the country have taken a toll on financial markets.

In a nutshell, Ramsey advises federal employees to invest at least 5% in a Roth TSP, then invest the rest in a Roth IRA. He also recommends investing in a handful of TSP funds -- funds C,S, and I -- with a higher percent in the C Fund (at least 60 to 80%).

As of Dec 2021, the total TSP expense ratio was 0.49%, comprising $0.043% net administrative expense ratio and 0.006% investment expense ratio. An expense ratio of 0.049% represents 4.9 basis points or $0.049 per $1000 TSP account balance.

Because we're making the payment directly to you and not to your other retirement plan or IRA, we are required to withhold 20% of your payment for federal income taxes. This means that in order to roll over your entire payment, you must use other funds to make up for the 20% withheld.

The conservative funds are the G and F funds and the aggressive funds are the C, S, and I funds.

Answer: More! I frequently state that there is no such thing as too much money in the Thrift Savings Plan. If you want your TSP balance to be able to generate an inflation-indexed annual income of $10,000, most financial planners will suggest that you have a $250,000 balance at the time you retire.

By this measure, the I Fund is the riskiest, with a maximum drawdown of -60.89%, which occurred during the 2008-2009 global financial crisis.

The TSP returns are off to a good start so far in 2023. Hopefully, TSP investors will be looking at a good return on their investment for the year after a disappointing 2022.

How to get rich with TSP? ›

The latest figures show that there are now 76,889 millionaires as of the end of 2022. That is an increase of about 17.4% since the end of September.

The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. government. Thus, there is no “credit risk.”

Best Performance Among Lifecycle Funds

The Lifecycle (L Funds) with the highest returns were the most aggressive funds as their percentage of stocks in the account is the highest. This means the L 2065, L 2060, and L 2055 provided investors with the best annual returns (19.90%).

Average TSP account balances for Uniformed Service Members crested over $40,000 by the end of 2021, while balances for new 'Blended Retirement System' (BRS) participants reached close to $10,000 in just four years since the BRS became operational.

Experts generally suggest that you'll need about 80% of your salary after retirement to avoid sacrificing your lifestyle. This isn't a perfect rule — after all, if you're used to living a frugal, savings-oriented lifestyle, you could probably retire comfortably on less. However, it is a good starting point.

How much should I contribute to my TSP? One common suggestion for how much to save for retirement is at least 15% of your income. Others believe that the minimum should be whatever maximizes your employer contribution; in the case of TSP funds, that would be 5% of your income.

Leave it in the TSP and let it grow

Depending on when you begin retirement, you can simply leave the money in the TSP let it continue to grow. If you do not need to access it yet, it might be wise to let it be. Similar to other retirement accounts, you will need to begin minimum withdrawals at age 72.

Reporting taxes

We report all TSP withdrawals and distributions to the IRS, to the appropriate state tax agencies if applicable, and to you on IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

With traditional TSP, your contributions go into the TSP before tax withholding, which can potentially lower your current income tax rate. But when you take money from your traditional TSP, you'll pay taxes on both your contributions and earnings at the income tax rate of the year you make the withdrawal.

Is TSP losing money? ›

The vast majority of offerings in the 401(k)-style Thrift Savings Plan did not have a good month in December—or a good year in 2022 for that matter. The S Fund, invested in small and mid-sized businesses, had the worst performance for December, losing 6.55%. It was down 26.26% for 2022.

TSP Performance Up in March and Year-to-Date in 2023

The C Fund is up 7.49% so far in 2023. The Fund with the best return so far this year is the I Fund which is up 8.63%. Some investors will note that the I Fund is near the bottom in popularity among TSP investors. 3.6% of participant allocation goes into the I Fund.

However, the L Income Fund is the most conservative of the L Funds. It focuses on money preservation while providing a small exposure to the riskier funds (C, S, and I Funds) in order to reduce inflation's effect on your purchasing power.

Contributing to the TSP

But here's the deal. The U.S. government will provide a 5% contribution of your basic pay to the TSP, so 5 percent is the absolute minimum you should be contributing. If you contribute less than that, you're missing out on free money.

You have several options for how to use the money in your TSP account after you retire or separate from federal service or the uniformed services. You can keep money in your TSP account as long as you want to.

It depends, but most people should contribute to their TSP at least up to the matching funds limit (3% of your salary). Beyond this, the TSP is better if your taxes are high today and you expect them to be much lower in retirement. It is better to use your deduction against the higher tax rate.

The C Fund is a heavily diversified investment but it does come with the risks. The C Fund is moderately volatile and is subject to market risk as the price of stocks in the S&P 500 Index rise and fall. Further, you are exposed to inflation risk if your C Fund investment does not grow enough to offset inflation.

Your catch-up contributions will be in addition to the 2023 TSP regular contribution limit, which means employees can contribute up to $30,000 in 2023. To maximize the catch-up contribution amount of $7,500 for 2023, employees will need to contribute an additional $288 per pay period ($7,500/26 = $288.46).

Because your TSP withdrawals do not account for inflation, it's up to you to adjust the payments on an annual basis. This means withdrawing enough to account for inflation — and saving enough while you're still working. Financial experts recommend using the 4% rule once you retire to account for inflation.

The IRC § 402(g) elective deferral limit for 2023 is $22,500. This limit applies to the traditional (tax-deferred) and Roth contributions made by an employee during the calendar year.

What percentage of TSP investors are millionaires? ›

Overall, TSP millionaires now make up just shy of 1% of all TSP accounts.

Given the current economic and market cycle, if you're nearing retirement and your cash reserves are not close to at least 6-12 months of your expenses, you may want to consider slowing down your TSP contributions so that you are able to take more of your paycheck home and use that additional capital to build up your ...

As of December 2022, there were estimated to be just over 15 million HNWIs in the world according to the World's Wealthiest Cities Report 2023 by Henley & Partners. The United States had the highest number of HNWIs (5.3 million) of any country, whilst New York is the wealthiest city with 340,000 HNWIs.

According to Credit Suisse, individuals with more than $1 million in wealth sit in the top 1 percent bracket. The billionaire class is $2.6 trillion richer than before the pandemic, even if billionaire fortunes slightly fell in 2022 after their record-smashing peak in 2021.

Spouse beneficiaries can keep their balance in their TSP beneficiary participant account. Beneficiaries must first be identified and located, their Social Security numbers (or Employer Identification Numbers for estates or trusts) must be obtained and verified, and their addresses and dates of birth must be confirmed.

It is important to remember that one of the only ways to lose money while investing is to sell when the market is down. If the market drops and we don't sell (or move to the G fund) then we haven't lost anything yet. We only lock in our gains or losses when we sell.

The rule of 55 is an IRS provision that allows workers who leave their job for any reason to start taking penalty-free distributions from their current employer's retirement plan once they've reached age 55.

Your best bet is to stick with the C, S and I Funds. Here's the ratio we recommend for your portfolio: 80% in the C Fund, which is tied to the performance of the S&P 500. 10% in the S Fund, which includes stocks from small- to mid-sized companies that offer high risk and high return.

If you're a FERS, CSRS, or BRS participant who began or rejoined federal service on or after October 1, 2020, your agency or service automatically enrolled you in the TSP, and 5% of your basic salary is deducted from your paycheck every pay period and deposited into the traditional balance of your TSP account unless ...

To have access to IRA funds without a 10% early withdrawal penalty, you must be 59 ½. As previously stated, regular FERS employees separating from service the year they are turning 55 or older can access their TSP without that 10% penalty.

What is the average amount in a TSP account? ›

Average TSP account balances for Uniformed Service Members crested over $40,000 by the end of 2021, while balances for new 'Blended Retirement System' (BRS) participants reached close to $10,000 in just four years since the BRS became operational.

When you separate, you can leave your entire account balance in the TSP if it is $200 or more. Your account will continue to accrue earnings and you can continue to change the way your money is invested in the five TSP investment funds by making interfund transfers. You can make an interfund transfer at any time.

Unlike investment accounts, TSP withdrawals don't get the advantage of being taxed at the lower long-term capital gains rates. TSP withdrawals are always taxed at your ordinary income tax rate. However, whenever you take money out of the Roth TSP then that money comes out completely tax free.

SECURE 2.0 increases the start age for required minimum distributions from 72 to 73 in 2023 and then further increases the start age to 75 in 2033. We're continuing to assess how SECURE 2.0 will affect the TSP and will provide updates as more details are finalized.

When you are ready to withdraw your money from your TSP account, you can do it all at once (commonly referred to as a lump-sum payment) or over a period of time. Or you can purchase an annuity that will make payments to you for life. You also can choose any combination of these full withdrawal options.

If you have already separated from federal service, the IRS requires you to make a withdrawal choice before April 1st (of the year following the year you become age 72, referred to as the mandatory TSP Withdrawal Age).

In addition to making regular TSP contributions, you may also make TSP Catch-up contributions, if you are age 50 or older (or will be turning age 50 in 2023). The 2023 IRS annual limit for Catch-up contributions is $7,500. This amount is in addition to the regular TSP limit of $22,500.

Looking back a decade, there were a mere 208 TSP millionaires back in 2011. On average, TSP millionaires have been contributing to their plans for 28.5 years. The largest TSP account balance the end of March 2021 was an astounding $9,318,238, which is up from “just” $6.3 million March 2020.

They have participated in the TSP for an average of 28.2 years. The largest single end-of-year balance in the largest defined contribution plan in the world totals a staggering $10.9 million, up from $8.8 million a year ago.

It is entirely up to the FERS annuitant to decide when to start receiving Social Security retirement benefits and when to start making TSP withdrawals. At some point of the FERS annuitant's retirement, these two sources of retirement income will have to be tapped in order to pay expected retirement expenses.

Can my wife take my TSP in a divorce? ›

Your current or former spouse, or your dependents, could be awarded a portion of your TSP account if a valid Retirement Benefits Court Order (RBCO) to divide your account is issued. The RBCO can be issued at any time in the divorce, annulment, and separation proceedings.

By using a TSP to pay off a mortgage, you will lose the mortgage-interest deduction that reduces your AGI, or adjusted gross income. Further, because tax-deferred assets are being used to pay off the mortgage, the tax consequences are compounded¹.