6 Mistakes Federal Employees Make With Their Savings Plan
A Thrift Savings Plan (TSP) is a type of retirement plan that only federal employees and members of the law enforcement community, including Ready Book, can use. It is a defined contribution plan that provides federal workers with benefits more or less similar to normal pension plans for people working in the private sector.
The TSP is somewhat similar to a 401(k) plan. The TSP and 401(k) have similar policy structures and payment limits. However, instead of a 401(k), a TSP is provided to a federal employee. Therefore, you cannot have a TSP and a 401(k) at the same time.
Despite all the benefits and ease of management of the Thrift Savings Plan, many federal employees still make a few mistakes when investing in their TSP accounts.
Let’s look at some of the mistakes made by federal employees in their savings plan:
1. Consider not contributing to the TSP
As a federal employee, 5% of your bi-weekly salary must be contributed to your Thrift savings plan. By donating 5% of your salary to your TSP, your agency contributes a maximum of 5% to your plan, doubling your monthly donations. So you end up adding more money to your TSP by paying only half the amount.
Deciding to opt out of TSP is a rookie mistake for a freshly hired employee. The sooner an employee starts investing in the TSP, the more money the TSP has to grow. It will also benefit from tax deferral for regular TSPs and tax exemption for Roth TSPs.
2. Don’t give more than 5% of your income
If having a simple and comfortable retirement is your ideal dream, then a 5% contribution may not be enough. Suppose that a 5% contribution plus your agency’s 5% (totaling a 10% contribution) is insufficient for an employee’s future.
Individuals must save at least 15% of their annual income for retirement (split between your contributions and the company). This means that as an employee, you must save at least 10% of your salary each year to save at least 15% (with a 5% contribution from the employee’s agency) for the year. This is only available to federal employees under the Federal Employees Retirement System (FERS).
3. Invest only in fund G
Most federal employees prefer to invest in the Government Securities Investment Fund, a.k.a Fund G. It’s because they think it’s a safer option. The fund invests in short-term US Treasury securities issued exclusively for the benefit of the TSP, thereby ensuring that the federal government provides payment of principal and interest. The G fund can be a safe bet even when the stock market is in turmoil.
Unfortunately, putting all your money in the G Fund can expose your retirement funds to inflation risk. However, spreading your money between two or more funds (there are five different base funds to choose from) could offer better diversification as well as greater potential for growth. These two benefits will help you counter the corrosive effects of inflation and maintain your purchasing power in retirement.
4. Leaving 401(k) Retirement Plans After Joining the Feds
As a federal employee, when you move from one employer to another, there are a lot of changes. Of course, you might not have known that an employer-sponsored certified retirement plan, like a 401(k) plan, can be transferred directly to an employee’s TSP account after they leave their job. . In the long run, leaving money from your retirement fund in a 401(k) and not keeping track of it can have dire consequences.
5. Playing “catch up” after starting late in the TSP
Many federal employees who start saving for retirement later in their careers or stop contributing to the TSP for a long time mistakenly believe that they can make up for “lost time”. It’s not true. On the other hand, the stock market does not work that way. If a TSP participant does not participate for an extended period, they lose the investment returns that would have been earned had the money been invested.
6. Not using your TSP to pay off your debt
Federal employees and uniformed service members can get a loan from their Thrift savings plan called a TSP loan. They can borrow money from their retirement plan with this type of loan. A TSP loan is usually simple to borrow. If you intend to use the funds for residential purposes, you may need to complete additional documentation.
TSP loans allow you to borrow up to $50,000, as long as you have enough money saved in your TSP fund. You will have a maximum of 5 to 15 years to repay the money. You will have a fixed interest rate, depending on the use of the money. You can have the money deducted from your salary to make the payments.
With the help of a TSP loan, you can eliminate payday loan debtcredit card debt, medical debt, etc. It can also be used to make payments on your student loans or mortgage payments.
Therefore, taking out a loan from your TSP fund may not be a good idea if you are planning to quit your job. If you leave government employment with an unpaid TSP debt, you must repay the full loan amount within 90 days. If the loan amount is not repaid on time, the IRS will treat the full amount as a taxable distribution and tax the total as earned income. Additionally, TSP borrowers under age 59 may be subject to a 10% early withdrawal penalty.
The Thrift Savings Plan is an integral part of all federal and law enforcement employees. If understood and used correctly, the TSP has many benefits to offer its users. It is crucial to keep these errors in mind and rectify them as soon as possible. You never know how much money you might miss out on because of these mistakes.
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer credit and drafting. He has been a member of the California State Bar since 2003. He graduated from the McGeorge School of Law at Pacific University in Sacramento, California in 1998 and currently works for the Oak View Legal Group in California as a senior attorney.
© 2022 Lyle Solomon. All rights reserved. This article may not be reproduced without the express written consent of Lyle Solomon.