What is the Thrift Savings Plan (TSP)?
TSP is a retirement and savings plan for Federal employees and members of the uniformed services, including folks serving in the Ready Reserves. This topic is particularly important when thinking about equitable distribution and property division – especially in the context of overall retirement benefits. Think of it like a “401(k)” plan offered through an employer, except in this case the employer is the Federal Government. Even if a service-member does not qualify for a military pension (meaning that he or she leaves the service prior to 20-years), the amounts contributed to a TSP will still be available to the service-member, as well as any gains accumulated.
TSP is a defined contribution plan. Service-members are not required to pay into a TSP account. However, if a service-member decides to contribute a portion of his or her dollars from each paycheck, the amount of retirement income someone can receive from a TSP account depends on how much a person has contributed into the plan. Some federal employees also benefit from an employer-match – such as those federal employees whowill receive a pension through the Federal Employees’ Retirement System (FERS).
As of May 2012, a service-member not only has the choice to contribute to TSP with pre-tax dollars similar to a 401(k) plan, but rather to decide to contribute to TSP with after tax dollars similar to a Roth Individual Retirement Account.
Once an amount is decided upon for the TSP contributions, the service-member then has to decide how the funds will be invested. There are several funds that are available under TSP. For example, there is a bond index fund, a stock index fund, a fund that invests in small cap companies, as well as an international fund, among others.
It is important to find out how much was contributed to TSP and exactly when. It is most pertinent to look to amounts contributed during the marriage, as well as amounts gained on those contributions. Make sure you read the “Property Division” link to the left to learn about separate property versus marital property.
This is an important aspect of overall retirement benefits that should be looked into with an attorney and tax advisor when discussing equitable distribution during a divorce case. Contributions to TSP may be made from pre-tax dollars and the earnings on those contributions are tax-deferred. Service-members do not normally pay income taxes on contributions or earnings unless or until the funds are actually withdrawn.
In 2012, the combined total limit (or maximum) of tax-deferred traditional contributions and Roth IRA contributions under the Internal Revenue Code was $17,000. In addition to contributing a portion of basic pay to TSP up to this limit, a service-member can also contribute up to 100% of any incentive pay, special pay, or bonus pay, as long as he or she has elected to contribute at least 1% from basic pay.
If you are the military spouse, you particularly want to be thinking about TSP contributions because a court order may be required to divide the funds in the service-member’s TSP account. You should bring this to the attention of your attorney to best discuss the mechanism for discovering this information, preserving your interest in TSP, and ultimately dividing and transferring your share into an individual or other retirement account. This can have tax implications as well and you should consult a tax advisor prior to transferring any amounts, otherwise you may be in danger of having to pay various taxes because of an unintentional withdrawal or distribution.
One last important piece of information about TSP…
In certain instances, a service-member can take a loan out against his or her TSP account. This may also be crucial information to know when negotiating either to maximize your share of your own TSP account or to maximize your share of the account in equitable distribution if you are the non-contributing spouse to the TSP plan. As you can see, TSP can be rather complicated and it’s best to discuss this in detail with an attorney and tax advisor prior to taking any specific action on the TSP account.