How A Furlough May Affect Your TSP
The Thrift Savings Plan (TSP) issued today a new fact sheet which provides
answers to some of the questions that participants may have about the impact of
a sequestration furlough on their TSP contributions. It also discusses
alternatives for accessing TSP funds should a participant face significant
financial hardship as a result of a furlough.
How will a furlough affect my TSP contributions?
As you know, your TSP employee contributions are deducted from your pay. If
you are currently making contributions based on a percentage of your basic pay,
here's what happens: If you earn $1,000 of basic pay every two-week pay period
and you contribute 10% of it to the TSP, you'd have a $100 TSP contribution
every pay period. If you are furloughed for 2 days per pay period, then your
basic pay would decrease to $800 and as a result, your TSP contribution would
decrease by an equal percentage so that your contribution would be $80 per pay
period. Simply stated, your TSP contribu¬tion decreases in direct proportion to
the reduction in your basic pay. Therefore, you may find that lowering your
contribution percentage is not necessary.
But if you are currently making TSP contributions based on a dollar amount of
your pay, that dollar amount will not automatically decrease with your reduction
in pay. You may want to revisit whether that amount is still appropriate given
the expected impact of your furlough.
If you are a FERS participant, also keep in mind that any reduction in your
basic pay will impact your agency contributions. Whether you are contributing a
percent¬age of your pay or a specific dollar amount, your Agency Automatic (1%)
and Agency Matching Contributions will decrease proportionally. If you then
choose to decrease the amount of your TSP contributions, be sure you understand
how it will affect your agency contributions.
For more information, visit Types of Contributions at:
Should I terminate my TSP contributions?
If you are making traditional contributions, remember that those
contributions are subtracted from your pay before tax. Be aware that stopping
this type of contribution could potentially increase your adjusted gross in¬come
and, as a result, your income tax liability.
Also, think carefully about terminating your contributions. 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. And, if you are a FERS participant, you
are leaving free money on the table because if you stop your contributions, your
matching contributions stop as well.
Should I consider a financial hardship withdrawal?
For some, sequestration and the resulting furloughs will cause a significant
financial hardship. But before you consider a TSP hardship withdrawal, keep in
mind a few things:
- If you take a hardship withdrawal, you will not be able to make any TSP
contributions for 6 months after having received your funds.
- You may withdraw only your contributions and the earnings associated with
them, and the total amount cannot exceed your financial hardship.
- You must pay income tax on the taxable portion of any withdrawal, and you
may also be subject to a 10% early withdrawal penalty tax.
- If you are a FERS participant, you will not receive Agency Matching
- A hardship withdrawal cannot be repaid so your TSP account is permanently
reduced by the amount of your withdrawal.
- Taking a loan may be a better option (see below).
For more information, visit Financial Hardship In-Service Withdrawals
Should I take a TSP loan?
Taking a TSP loan allows you to borrow money from your account while you are
still actively employed by the federal government. You repay your own TSP
account for the amount of the loan (plus interest) and therefore continue to
accrue earnings on the money you borrowed after you pay it back. Before you
request a loan, you should know the following:
- If you expect to be furloughed on a continuous basis, you can only take a
loan if your furlough is expected to last 30 days or less.
- If you expect to be furloughed on a periodic basis (for example, one or two
days per pay period), you can take a loan.
- Loan payments are made by payroll deduction. If, because of a furlough, you
don't earn enough per pay period for your agency to deduct the required loan
payment, you will be responsible for keeping your loan payments up-to-date so
that you don't risk a taxable distribution. (Properly repaid TSP loans are not
subject to income taxes or penalties.)
- You can continue to contribute to your TSP ac¬count and, if eligible,
receive Agency Matching Contributions.
- If you already have an outstanding loan when you get furloughed, you need to
make sure that you stay up-to-date on your loan payments.
For more information on TSP loans, visit: