The Thrift Savings Plan in Virginia Military Divorce
The TSP, or Thrift Savings Plan, is the federal government’s version of a 401(k) plan. Military service members, members of the reserves, and other federal employees are entitled to participate in the Thrift Savings Plan.
Retirement accounts, as you probably already know, are super important in divorce cases. If we’re talking about equitable distribution (the fancy word we use in Virginia to describe how property can be divided), retirement accounts are often one of the first issues people raise.
Who is eligible to participate in the Thrift Savings Plan program?
Federal government employees can participate in the Thrift Savings Plan even if they don’t serve long enough to qualify for a military pension. Because it’s like a 401(k), and the employee controls how much of his or her income is invested in the plan, there’s no amount of time served in order for a federal employee or military service member to be entitled to receive it. Any money contributed to the Thrift Savings Plan account would be available to the service member at retirement age, including any gains.
The TSP is a defined contribution plan, which means that a member pays into the account. Usually, a service member (or federal employee) would decide to contribute a certain portion of his or her paycheck into the account—this can be in the form of an overall percentage (like 10%), or a dollar amount (like $250 a month). Of course, there’s no requirement that a person HAS to contribute to the TSP; no more so than civilian employees are required to participate in a 401(k) plan offered by their employer. It’s a benefit (and a valuable one) that is offered to the employee, should he or she choose to participate in the program.
What are the benefits of participating in the Thrift Savings Plan?
Also, like a 401(k) account, employers have the option of matching employee contributions—though this is up to the employer. Federal employees receiving a pension through the Federal Employees’ Retirement System (FERS) benefit from such a matching program.
Another benefit is that a service member or federal employee has the option to contribute to his or her TSP with pre-tax dollars, like a 401(k) plan, or, alternatively, to contribute with after tax dollars (like in a Roth IRA). The flexibility of being able to choose which way to contribute gives participants even more ability to customize their own retirement savings plan, which is pretty cool.
What are the advantages of the pre and post tax dollar contributions?
Traditionally, 401(k) accounts, which are pre-tax plans, are advantageous because the money is taken out of the employee’s paycheck pre-tax, which means that it’s not a dollar for dollar deduction. A person could put $100 a month into their TSP (or 401(k) account) without reducing their take home pay for a full $100. Instead, their take home pay might be reduced by only $75 or $80, depending on their tax bracket. This, as you can probably already tell, is very attractive because it makes saving seem easier; less money comes out of your paycheck each month and then it accumulates in the retirement account over time. Then, when the time comes to take a withdrawal, taxes will be paid on the amount withdrawn. Participating in this manner can also be advantageous because it lowers your taxable income. If you earned, for example, $40,000 last year, but you were able to squirrel away $10,000 in your retirement account, only $30,000 in income would have been taxable to you—reducing your overall tax responsibility for the year. Why might that be helpful? For a lot of reasons (and you may want to consult with a CPA or tax advisor on this one, keeping in mind that I am neither), but the one that springs most readily to my mind is if you’re making income based payments on a student loan. Contributing to a retirement account this way reduces your income and, as a result, reduces your monthly student loan payment obligation (provided, of course, that your income falls within those parameters).
If the federal employee or service member elects to have post tax dollars contributed, it reduces the dollar by dollar amount of your paycheck each pay period, but you don’t have to pay taxes when you take your money out of your account later on. That’s nice, as you probably can imagine, because it provides some level of foreseeability. You know what the tax rate is now; there’s no telling what it will be in 10, 20 or 30 years when you actually need to retire.
Again, in order to make a decision about how to structure your Thrift Savings Plan account, you may want to talk to an attorney, CPA, or other tax advisor.
How is the money in a Thrift Savings Plan account invested?
Again, it’s a lot like a 401(k). When a service member begins to contribute to the TSP, he or she then has to decide how to invest the money contributed. Lots of different funds, including a bond index fund, a stock index fund, a small gap fund, and an international fund, are available under the TSP program.
How much of what I’ve contributed to my TSP is marital, and how much is separate?
Whatever you contribute to your TSP during marriage is a marital asset; anything that you contributed prior to your marriage or after separation is separate property. Any gains associated with contributions during either of those periods are classified the same as the principal contribution. Let’s say, for example, that during your marriage you contributed $10,000, which grew to $13,000 by the time of your divorce The entire $13,000 is a marital asset.
If, on the other hand, you contributed $10,000 to your TSP account prior to marriage and then, by the time you separated, the amount of that initial contribution reached $13,000, the entire $13,000 (your initial investment plus any gains associated) is separate property.
If you or your husband has a TSP account and are headed towards divorce, you’ll definitely want to talk to an attorney. For more information, or to talk to one of our licensed and experienced Virginia divorce and custody attorneys, give our office a call at (757) 425-5200.