Federal employees who experience financial trouble due to a sequestration-caused furlough will have several options available through their Thrift Savings Plan accounts, but important considerations apply to each, the TSP said in guidance issued Friday.
Investors in the 401(k)-style program could cut back or stop their investments, borrow against their accounts or take a special form of withdrawal.
The guidance says that participants should “think carefully” before stopping investments. “One of the great things about your TSP contributions, no matter how small, is that the earnings compound over time. If you stop your contributions, even for a short time, you’ll miss this opportunity altogether,” it says.
In addition, employees under the Federal Employees Retirement System would be “leaving free money on the table because if you stop your contributions, your matching contributions stop as well.” Employees under FERS get an automatic 1 percent of salary employer contribution, but matching contributions of up to an additional 4 percent of salary are made only if the employee is investing personal money. Employees under the Civil Service Retirement System get no employer contributions into their accounts.
Employees who are investing based on a percentage of salary will have those investments reduced proportionately when they are on unpaid leave, the TSP said, and matching contributions for FERS employees also will decrease. Those investing according to a fixed dollar amount would not see a change, however.
In addition, employees using the traditional design of pre-tax investing should remember that stopping that type of investment could increase their income tax liability, the guidance says. That consideration would not apply to Roth-type investments.
The TSP allows participants to take out “financial hardship” withdrawals, but several important restrictions apply, the TSP said. There are limits on how much can be withdrawn, there are tax implications, and those who take such withdrawals may not invest again for six months — with FERS employees again losing the value of matching contributions. Those withdrawals cannot be paid back.
The guidance says that taking a loan “may be a better option,” since that allows employees to continue to invest, and receive matching contributions if under FERS, while paying it back. Also, there are no tax implications if the loan is repaid as required, it said.