If you own a Thrift Savings Plan account and plan to use it to fund your standard of living in retirement, you are a pension fund manager. As a pension fund manager, you are responsible for the standard of living your TSP account produces. This standard of living will depend heavily on the decisions you make in the course of managing your account.
It is critical to recognize that a single stumble along the way — one bad outcome from one bad or overlooked decision — can cost you dearly later in life. The margin for error is razor thin, and the penalty you pay for mistakes can be incredibly high. If you knew today that your asset allocation choice, while protecting you against the risk of a market crash tomorrow, were going to reduce your income 30 years from now by half of what it could be, would you reconsider? To give yourself the best chance of realizing the best results, you need to make sure that all of your management decisions consider all of the risks and rewards and are the best they can be.
You must start with a good understanding of the rules of the game before you can apply more sophisticated analytic techniques. You must understand the basics, having separated fact from fiction.
Here are five myths I hear TSP participants repeat far too frequently:
Myth: You must withdraw your TSP balance when you separate from service.
Not true. You may leave your money in the TSP, and continue to manage it there, as you see fit, for life. Under Internal Revenue Service rules, you may have to take distributions from your account beginning as early as age 71, but this may not apply to you, and in no case will you be required to empty your account while you’re still alive.
Myth: There is a penalty for leaving your money in the TSP after you leave government employment.
This one is so common, and so wrong, that I suspect it is propagated by sales people trying to convince unsuspecting TSP participants to roll over their balances to IRAs. There is no additional cost, or penalty, for leaving your money in the TSP after you leave federal service. The IRS may impose a penalty if you fail to take required minimum distributions later in life, but this is also true for IRA and 401(k) accounts.
Myth: The IRS early withdrawal penalty is waived for certain categories of employment.
Certain public safety employees may take distributions from their defined benefit pension plans without being subject to the early withdrawal penalty. There is confusion about whether this exemption also applies to TSP distributions made before the participant reaches age 59½. It does not.
Myth: The early withdrawal penalty is waived for early retirement.
Fact: Whether your early retirement is voluntary or involuntary, with incentive or without, has no bearing on the early withdrawal penalty and your TSP distributions. There are a number of exceptions to the penalty, but this isn’t one of them.
Myth: Better investment performance is available outside TSP.
Fact: The TSP offers everything you need to produce superior investment performance: access to markets, adequate diversification and low cost. If someone else claims that they can deliver better results than what can be produced by good management applied to a TSP account, you shouldn’t bet on it.
Good results come from good management. Good management is built from good decisions. Good decisions require knowledge and understanding. Knowledge and understanding are based on facts. Separating fact from fiction is your first job as a pension fund manager.