In the month of October, our nation’s government was active in making significant adjustments that will affect federal employees in 2018.
You may have already heard the terms, “TSP Modernization Act” and “TSP contribution limit” buzzing around your workplace, in the news, or elsewhere; but perhaps you’re not sure what these specific changes entail or how they might affect you.
So, let’s take a brief look at what these adjustments will mean for you as a current or former federal employee.
First, on October 12th, the House passed the TSP Modernization Act. Each year, so many federal employees transfer their TSP funds to other accounts because of the TSP’s heavy withdrawal restrictions. So, the purpose of this legislation is to replace the plan’s outdated withdrawal rules with a modernized set of rules that make the Thrift Savings Plan more appealing to its participants. Though this legislation has been passed in the House, it has yet to be passed in the Senate – but is expected to do so.
The TSP Modernization Act includes 4 notable adjustments:
- In-service, age-based withdrawals. For those who are active federal employees, you were previously allowed one age-based withdrawal. That restriction has since been lifted, and multiple age-based withdrawals are allowed.
- Partial post-separation withdrawals. For those who are no longer federal employees, you were previously allowed one partial post-separation withdrawal, and none if you had already made an in-service, age-based withdrawal. That restriction has since been lifted, and multiple post-separation withdrawals are allowed.
- Periodic payments resulting in full withdrawal. There have been a number of restrictions in place that prevent federal employees from receiving TSP payments in their preferred manner. Previously, payments were only available in monthly intervals, recurring payments could not be stopped barring a full withdrawal, and the payment amount could only be changed once per year. Under the new set of rules, payments are available in quarterly or yearly intervals, payments can be stopped while the balance stays in the plan, and payment amounts can be changed at any time.
- Election deadline for withdrawals. Previously, participants removed from federal service were required to make a post-separation withdrawal election by April 1st following the year in which they turned 70½. Under the new set of rules, there is no longer an election deadline.
The second major change – that came the week after the TSP Modernization Act was passed in the House – affects the TSP’s contribution limits, as announced by the IRS. These updates are expected annually, as they are cost-of-living adjustments (COLA). So, for the year 2018, there are a couple of notable changes.
The yearly TSP contribution limit has been increased from $18,000 to $18,500. While catch-up contributions are not matched and have a yearly contribution limit of $6,000 (unchanged from 2017), matching contributions have been adjusted:
- Even if the FERS employee contributes nothing to their TSP, their agency will put in 1%.
- If the FERS employee contributes 1%, the government will put in 2%.
- If the FERS employee contributes 2%, the government will put in 3%.
- If the FERS employee contributes 3%, the government will put in 4%.
- If the FERS employee contributes 4%, the government will put in 4.5%.
- If the FERS employee contributes 5%, the government will put in 5%.
Use this to your advantage! However, there are 2 very important things that you should note:
- This contribution matching is only available to FERS employees. If you are a CSRS employee, you are not eligible to participate.
- Contribution matching caps off at 5%, so any TSP contribution over 5% should go to your Roth TSP instead.
These are just a few of the adjustments that will be available to federal employees in 2018. As mentioned previously, TSP Modernization Act still needs to pass in the Senate but look for that to occur in the coming weeks!