The Thrift Savings Plan (TSP) plays a significant role in your federal retirement. You have been investing in it for years and now you’re hoping it adds to the financial security you need for the rest of your life. But what if you are disabled and must apply for Federal Disability Retirement? What happens to your TSP, and will you be able to access your money?
This article will break down the benefits of the TSP and what happens to it while on Federal Disability Retirement. If you have any additional questions, contact our firm today!
What is the TSP?
The Thrift Savings Plan is a part of every federal retirement plan along with social security benefits and a retirement pension. The TSP is a retirement investment option that allows you to make contributions that your agency will match in order to provide a financially secure retirement.
The TSP is similar to a 401k in the private sector. The money that you contribute grows tax-deferred and can be withdrawn after you reach 59 ½ years old. You can also take out loans against your TSP balance while you are still employed.
Your TSP can provide significant income in retirement if utilized correctly, but you should have a plan for what to do with your TSP on Federal Disability Retirement.
Benefits of the Thrift Savings Plan
The TSP agency match is one of the greatest benefits of becoming a federal employee. Your agency will automatically contribute 1% to your TSP whether you contribute or not, but the more you contribute, the more you will receive in retirement.
Your agency will match your contributions on the first 5% that you contribute to your TSP. This is an incredible benefit because it essentially doubles your money. As long as you are contributing at least 5% of your basic pay each pay period to the TSP, you can maximize your agency contributions and increase your retirement savings.
Regular employee contributions can be made from your paycheck, and you will choose Traditional or Roth. Traditional contributions go into the TSP before tax withholding, meaning you will pay taxes on both your contributions and earnings at the income tax rate of the year you withdraw. Roth TSP contributions go into the TSP after tax withholding, so you pay taxes at your current income tax rate and don’t have to worry about paying taxes later when you withdraw.
What should you know if you are considering applying for Federal Disability Retirement?
If you are considering applying for Federal Disability Retirement but are apprehensive about what will happen to your TSP, don’t worry! You should know that you have three options for your TSP on Federal Disability Retirement-
- Leave it alone. If you leave your TSP alone it will continue to accrue interest while you are on Federal Disability Retirement, and you will have more money when you are able to access it.
- Roll it over. Rolling over your TSP is an option if you have found a job in the private sector that allows rollovers into their retirement plan, or you can set up an Individual Retirement Account (IRA) to roll it into.
- Cash it out. You can cash your TSP out, but if you were approved for FDR before age 55, you will receive a 10% penalty for withdrawing from your TSP before you turn age 59.5.
You and your agency will no longer be able to contribute to your TSP while on Federal Disability Retirement. Your contributions come from your paycheck and since you will no longer be employed, you cannot contribute, but this doesn’t mean you will lose your money. Which option is best for you depends on your specific case and your plans for retirement.
Private Sector Options
The private sector has thousands of products that can be even more beneficial to federal employees. There are alternative index funds that are very similar to the funds of the TSP that could provide more return than the TSP.
It is recommended to speak with a financial advisor experienced with federal employees if you are interested in private sector options.
How to rollover your Thrift Savings Plan
You will be able to roll your TSP into a new employer’s plan, a 401K, or an IRA. This would allow you to continue growing your money while on Federal Disability Retirement. There are generally no penalties for rolling over your TSP, but make sure you are aware of any fees.
Retirement investment products typically have an early withdrawal penalty as well before age 59.5, so make sure if you roll it over that you have enough money to sustain you until that age.
It’s important to note that you can minimize taxes by rolling Roth TSPs to Roth IRAs and Traditional TSPs to Traditional IRAs.
Find a Trusted Advisor
Having an experienced financial advisor can help maximize your investments. Financial advisors have the expertise to create a plan for your finances and help you reach your retirement goals. Additionally, you can always contact the TSP to talk about your options and plans for retirement.
If you are a federal employee struggling with a disability, it’s important to be aware of all your options and how they will affect your federal benefits.
Federal Disability Retirement is a life-changing benefit, and we want anyone eligible to feel confident choosing this option for their future.
If you have any questions about your federal benefits or what will happen to them while on Federal Disability Retirement, schedule a FREE consultation with our firm!