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Federal Employees News Digest : April 22, 2013
April 22, 2013 Vol. 62, No. 38 7 Visit us on the internet at www.FederalDaily.com With sequestration a reality, furloughs will likely occur sometime during 2013 at many agencies. Many affected employees are asking how a furlough will affect their Thrift Savings Plan (TSP) accounts. This column examines the effects of a furlough on a TSP account, and discusses what affected federal employees should and should not do with respect to their TSP accounts. TSP employee contributions are deducted from an employee's salary. With the traditional TSP, con- tributions are deducted from an employee's gross (before-tax) salary. With the Roth TSP, contributions are deducted from an employee's after-tax salary. TSP contributions are also deducted from an employee's salary either: (1) as a percentage of basic pay (before- or after-tax salary); or (2) as a fixed dollar amount deducted from pay (before- or after-tax salary). The following examples illustrate: Example 1. John contributes 10 percent of his gross salary to the traditional TSP each pay date. John's gross salary each pay date is $3,000. John therefore contributes 10 percent of $3,000, or $300 to the traditional TSP each pay date. Example 2. Joan contributes $500 of her after-tax salary to the Roth TSP every pay date. Employees who are furloughed will lose a percentage of their gross salary for the days they are on furlough. For example, if an employee is furloughed for two days per pay period, then his or her gross salary for the pay period will decrease by 20 percent. If the same employee is contributing a percentage of gross pay to the TSP, then the actual amount he or she is contributing to the TSP is reduced by the same percentage. Consider Example 1 above. John is furloughed for two days for 10 pay periods, a total of 20 days. His gross salary of $3,000 per pay period will be reduced for each of those furloughed periods by 10 percent. Ten percent of $3,000 is $300, resulting in a gross salary for John during the furlough period of $2,700. John's contribution to his TSP account will also be reduced to 10 percent of $2,700, or $270, a decrease of $30 from non- furloughed periods. Note that if an employee is contributing a fixed dollar amount to the TSP each pay date, that dollar amount will not automatically decrease with a reduction of pay. Employees who are using a percent- age of their pay for contributing to the TSP may therefore want to reconsider whether that method for TSP contributions is appropriate given the impact of the furlough. Those participants who are covered by the Federal Employees Retirement System should also keep in mind that any reduction in their basic pay could impact their agency contributions. Whether they are contributing a percentage of their pay or a specific dollar amount, the employee's agency automatic (1 percent of gross salary) contribution will decrease proportionately. For matching contributions, in order for a FERS employee to receive the maximum 4 percent of gross pay matching contribution, the employee must contribute at least 5 percent of gross pay each pay date. Employees who are currently contribut- ing a fixed dollar amount to the TSP that is equal to at least 5 percent of their gross pay each pay date will not lose any matching contributions from their agency dur- ing furlough periods. In anticipation of future furlough periods and accompanying decreases in pay, what should employ- ees avoid to meet their anticipated cash flow needs? Employees should not suspend their TSP contributions. One of the great things about TSP contributions is that no matter how small the contribution, it will compound over time. Employees who suspend their traditional TSP contributions with their contributions being subtracted from their gross salary could potentially increase their adjusted gross income, possibly resulting in an increase of federal and state income tax liabilities. Also, FERS employees who suspend their contributions will have their matching contributions stopped, result- ing in the employee "leaving free money on the table." Employees affected by sequestration and furloughs should also avoid a financial hardship withdrawal from the TSP. The reasons for avoiding a TSP hardship withdrawal are: • If a TSP participant takes a hardship withdrawal, the participant will not be able to make any contributions for six months after hav- ing received those TSP funds. For FERS employees, this also means a suspension of agency matching funds during these six months. • A TSP participant who requests a financial hardship withdrawal may withdraw only their contributions and the earnings associated with them, and the total amount cannot exceed their financial hard- ship. • A TSP participant who requests a financial hardship withdrawal must pay income tax on the taxable portion of any withdrawal and the participant may also be subject to a 10 percent early withdrawal penalty tax. Employees who may be affected by a furlough should ideally build up their "liquid" savings -- money that is invested in passbook savings accounts or money market accounts. Ideally, an employee should have a minimum of six times their average monthly expenses invested in a liquid account. This money will be used to help pay bills or expenses during furlough periods with the accompanying reduced salary. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor The effects of sequestration on a TSP account
April 15, 2013
April 29, 2013