Avoid These Costly Thrift Savings Plan Mistakes

Sep 10, 2018

mistakesWhen you retire, your Thrift Savings Plan account may be the largest source of income you draw from. You’ll want to avoid these mistakes to ensure you maximize your retirement income.

Keep Your Beneficiary Forms Updated

It may be easy to forget about doing this, but not doing so, could have a significant impact on you. These beneficiary forms override any beneficiary stated in your will. If you pass away before updating these forms, TSP pays out in the following order:

  • Spouse
  • Child/ren equally, and descendants of deceased children
  • Parents equally or surviving parent
  • Appointed executor or administrator of your estate
  • Next of kin entitled to your estate under state laws in which you resided at the time of your death

If you need to select a new beneficiary, or change who it is, submit a TSP-3 form. This new form will supersede the old one.

Outstanding Loans

If you leave federal service and have an outstanding TSP loan balance, you can pay it back within 90 days of the date of your separation. If you fail to do this, the IRS will declare it as a taxable distribution, which may make you subject to the IRS 10% early withdrawal penalty.

Contribution Mistakes

If you want to change how your contributions are going into your TSP, do a Contribution Election change; to change your allocation, do an Inter-Fund Transfer; and to change your existing TSP allocation and your contribution election, do both. The major mistake here is most people who want to change how money is allocated only do a Contribution Election.

TSP Responsibility

You decide how much to contribute (up to IRS limits), what type of account (Traditional or Roth) is best, and how your funds are allocated. There is no formula for knowing what your “TSP annuity” will be at retirement.

Transferring to an IRA before age 59 ½

If you retire at age 55 or older and withdrawal from your TSP, there is no early 10% withdrawal penalty. Contrary, if you withdrawal from an IRA prior to age 59 ½, you will be subject to the 10% early withdrawal penalty. Transferring to an IRA requires you to leave enough room in your TSP to cover any withdrawals needed before age 59 ½.

Emptying your TSP

If you roll over your TSP funds to an IRA and later decide you want to roll them back to your TSP, you won’t be able to. You must leave a minimum of $200 in your TSP to be able to do this.

Contributing Only to a Traditional TSP

A Roth TSP taxes your money upfront, which means you pay tax now in today’s known tax environment. Who knows what it will be in 10, 20, or 30 years!

Not Understanding TSP Penalty Free Options Before Age 55

If you separate from service prior to 55, you can take life expectancy withdrawals and avoid the 10% early withdrawal penalty. This payment is locked for the longer of 5 years or reaching age 59 ½.

Life expectancy payments are payments made in all 12 months and recalculated each year based on your age and year-end account balance from the previous year. Your age and TSP balance determine the payments. Here’s an example of a trap many people fall into:

  • You begin taking life expectancy distributions at age 50. Once you turn 55, you contact TSP and stop the distributions. 5 years have gone by, so you may think you’ve satisfied the 5-year rule. The problem is it’s the longer of 5 years OR reaching age 59 ½. In this case, the longer would’ve been reaching 59 ½. Because of this, you would owe the IRS 10% of the total amount you withdrew from your TSP during these 5 years.

Your TSP plays a major role in your retirement years. It’s important to understand everything TSP has to offer and how not following the rules could hurt you. Try not to make these mistakes with your TSP account.

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