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Did You Know This About the Thrift Savings Plan (TSP) Government 401(k)?


Thrift savings Plan
Thrift Savings Plan

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The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees and members of the uniformed services, including the Ready Reserve. Often compared to a private-sector 401(k), the TSP has unique features and benefits designed to help government employees build a secure retirement. Here are some lesser-known facts about the TSP that highlight why it’s such a valuable investment tool for federal workers.


1. Ultra-Low Fees

One of the most significant advantages of the TSP is its remarkably low administrative fees. With an expense ratio of approximately 0.04%, the TSP is one of the least expensive retirement plans available. This means more of your money stays invested and grows over time.


2. Diverse Investment Options

The TSP offers five core investment funds: the G Fund (Government Securities Investment Fund), F Fund (Fixed Income Index Investment Fund), C Fund (Common Stock Index Investment Fund), S Fund (Small Capitalization Stock Index Investment Fund), and I Fund (International Stock Index Investment Fund). Additionally, there are Lifecycle (L) Funds, which automatically adjust the investment mix as you approach retirement.


3. Matching Contributions

For federal employees covered under the Federal Employees Retirement System (FERS), the government provides matching contributions. The government matches dollar-for-dollar up to 3% of your salary, and then 50 cents on the dollar for the next 2%. That’s an immediate 5% return on your investment!


4. Tax Benefits

The TSP offers two tax treatment options: Traditional TSP and Roth TSP. Contributions to a Traditional TSP are made pre-tax, reducing your taxable income now, and taxes are paid upon withdrawal in retirement. Conversely, contributions to a Roth TSP are made after-tax, and withdrawals in retirement are tax-free.


5. Portability

If you leave federal service, you can roll your TSP into another eligible retirement account, such as an IRA or a 401(k). Conversely, you can roll other eligible retirement accounts into your TSP, consolidating your retirement savings and potentially benefiting from the TSP’s low fees.


6. Loans and Withdrawals

The TSP allows participants to take loans against their accounts under certain conditions, providing a source of emergency funds without the penalties associated with early withdrawals. Additionally, the TSP offers multiple withdrawal options for retirees, including installment payments, single withdrawals, and annuities.


7. Beneficiary Options

The TSP allows you to designate beneficiaries to receive your account balance in the event of your death. This ensures that your savings are passed on according to your wishes.


8. Automatic Enrollment

New federal employees are automatically enrolled in the TSP with a contribution of 3% of their salary unless they choose to opt-out or change their contribution amount. This automatic enrollment helps new employees start saving for retirement immediately.


Big Changes for Roth TSP Balances in 2024: No More RMDs Before Death

Did you know that effective this year, Roth balances in the Thrift Savings Plan (TSP) are no longer subject to Required Minimum Distributions (RMDs) before a participant’s death? This change brings significant benefits for federal employees and members of the uniformed services who are looking to maximize their retirement savings.


What Are RMDs?

RMDs are mandatory withdrawals that the IRS requires from certain retirement accounts once the account holder reaches a specific age. Traditionally, Roth IRAs have been exempt from RMDs during the account holder’s lifetime, but Roth TSP balances were not. This meant that TSP participants had to start taking RMDs from their Roth TSP accounts, potentially disrupting their financial planning.


The New Rule

Starting in 2024, Roth TSP balances are exempt from RMDs before the participant’s death. This change aligns the TSP with Roth IRAs and offers greater flexibility and control over retirement savings. Participants can now leave their Roth TSP funds to grow tax-free for as long as they live, without the pressure of mandatory withdrawals.


Benefits of the Change

  1. Increased Tax-Free Growth Without RMDs, Roth TSP balances can continue to grow tax-free, potentially increasing the amount of tax-free income available during retirement.

  2. Greater Flexibility in Retirement Planning Participants have more control over their retirement savings and can choose when and how much to withdraw from their Roth TSP accounts based on their financial needs and goals.

  3. Enhanced Estate Planning The change makes it easier to leave a larger, tax-free inheritance to beneficiaries, providing them with a more substantial financial legacy.


Did you know that in 2024, the Federal Retirement Thrift Investment Board will change the I Fund’s benchmark index? This change is part of an ongoing effort to optimize the investment options available to federal employees and uniformed service members.

What’s Happening?


Starting in mid-2024, the I Fund, which is currently benchmarked to the MSCI EAFE Index, will switch to the MSCI ACWI ex USA IMI Index. This new index includes a broader range of international investments, encompassing both developed and emerging markets outside the United States.


Why the Change?

The current MSCI EAFE Index primarily covers developed markets in Europe, Australasia, and the Far East. By switching to the MSCI ACWI ex USA IMI Index, the I Fund will now include emerging markets, offering a more diversified and comprehensive international investment option. This change aims to provide TSP participants with greater exposure to growth opportunities in emerging economies.


What Does This Mean for TSP Participants

  1. Increased Diversification: The new index will include over 6,000 stocks from around the world, compared to about 900 in the current index. This increased diversification can help reduce risk and potentially enhance returns over the long term.

  2. Broader Market Exposure: The inclusion of emerging markets allows participants to invest in regions with high growth potential, which were previously excluded.

  3. Enhanced Growth Opportunities: Emerging markets often experience higher growth rates than developed markets. By including these in the I Fund, participants may benefit from increased growth potential.


Preparing for the Transition

TSP participants should review their investment allocations and consider how this change might impact their overall retirement strategy. The Federal Retirement Thrift Investment Board will provide detailed information and guidance as the transition date approaches.


The upcoming change to the I Fund’s benchmark index represents an exciting development for TSP participants. By adopting a broader international index, the TSP aims to enhance diversification and provide access to a wider range of growth opportunities. Stay informed and consider how this change can benefit your retirement portfolio.


 


Appalachian Federal Benefit Resources plays a crucial role in guiding federal employees through the complexities of their benefits, ensuring they can retire with confidence and financial security. For more detailed information and personalized assistance, visit the AFBR website.


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