The Thrift Savings Plan offers a number of tax advantages to help federal employees save for retirement. You are allowed to fully deduct your contributions to a TSP from your taxes. This tax advantage is offered to help you plan for retirement. Non-retirement withdrawals from your TSP may be penalized.
You are allowed to fully deduct your TSP contributions from your income. Your TSP contributions are considered an adjustment to income. You can take this deduction even if you do not itemize your other tax deductions.The TSP delays taxation of your income until you reach retirement. Once you begin making withdrawals during retirement, you will owe taxes on the entire withdrawal. The TSP offers tax-deferred growth, not tax-free growth, for your retirement contributions.
There is a maximum annual limit for making contributions to your TSP. You are allowed to invest and deduct $16,500 of your salary every year into a TSP. If you are 50 or older, you are allowed to contribute an additional $5,500 catch-up investment into your account, raising your annual limit to $22,000. If you would like to invest more each year into a retirement fund, consider opening a traditional IRA. You are allowed to invest an additional $5,000 per year into an IRA on top of your TSP contributions.
The tax advantages of the TSP are offered to encourage retirement savings. The TSP account is not meant to be used before retirement. If you take a withdrawal from your account before you reach retirement, you will be charged a 10 percent early withdrawal penalty on the entire amount. If you have left the federal service, you can begin making retirement withdrawals at 55. If you are still working for the federal service, retirement withdrawals begin at 59 1/2. Withdrawals before this time will be considered early and charged the penalty.
Early Withdrawal Exceptions
In some situations, you can take an early withdrawal from your TSP without paying the early withdrawal penalty. If you become totally and permanently disabled, you can take penalty-free withdrawals from your TSP. You may also use your TSP funds to pay medical expenses that exceed 7.5 percent of your adjusted gross income. Lastly, you can take money out of your TSP to settle a court-ordered divorce. All other withdrawals will be penalized.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.