Members of the uniformed services and federal employees often get the benefit of participating in a thrift savings plan. This defined contribution plan, established in 1986, operates similar to a 401(k) and 403(b) and provides many of the same tax benefits -- including the option to fund your account with pretax money. The Thrift Savings Plan Enhancement Act of 2009 enabled the Roth TSP option, which lets you fund your account with after-tax money. In both cases, and similar to 401(k) and 403(b) plans, you cannot deduct your contributions on your tax return.
Traditional TSP Account
A traditional thrift savings plan lets you fund your account on a tax-deferred basis. No federal income tax is taken from your contributions, thereby giving you a tax savings at the time of payroll deduction. Though many states follow federal tax treatment for state income tax purposes, exceptions apply. For example, Kansas and Pennsylvania require that employers deduct state income tax from TSP contributions. Your employer must also withhold Social Security and Medicare taxes. Your traditional TSP contributions should not be included in your taxable gross pay on your tax return.
If you make pretax contributions, you must pay federal and applicable state income taxes on your contributions and earnings when you withdraw your money. An exception applies if you’re in the uniformed services and made tax-exempt combat contributions. If you served in a combat zone, any wages you earned in the combat zone may be exempt from federal income tax. In this case, you would pay federal income tax only on your contributions’ earnings.
With the Roth option, your employer takes federal and applicable state income tax plus Social Security and Medicare taxes from your payroll deductions. Therefore, you do not get a tax savings. Unlike the pretax option, your Roth contributions are included in your taxable gross pay on your tax return. The upside of a Roth account is that your contributions are tax-free when you withdraw from the plan, because you already paid taxes on them. You will also not pay any taxes on your earnings if you are at least age 59 1/2, are permanently disabled or deceased and if five years have gone by since Jan. 1 of the first year you first made your first Roth deposit.
Limits and Reporting
Your employer should include your contributions on your W-2 in Box 12, under Code D. As of 2013, you can put up to $17,500 into your traditional or Roth TSP. If your employer matches your funds, your limit is $51,000. If you’re 50 or older, you get to put away an additional $5,500 for the year. If you paid more than the annual limit, you must include the extra amount in your taxable wages on your tax return. If you made excess Roth contributions, the additional amount is taxable. However, you do not need to report it on your tax return because the extra amount is already stated as taxable earnings in Box 1 of your W-2.
- Investopedia: Thrift Savings Plan
- Nasa.gov: Implementation of Roth Thrift Savings Plan (TSP) Contributions
- Thrift Savings Plan: Tax Advantages
- Kansas Legislature: Fiscal Note for HB 2480 by House Committee on Taxation
- Pennsylvania Department of Revenue: Are My Contributions to a 401(k) Plan Excluded from Employer Withholding?
- Thrift Savings Plan: Summary of the Thrift Savings Plan
- University of Minnesota: Form W-2
- Thrift Savings Plan: Contribution Limits
- Thrift Savings Plan: Annual Limit on Elective Deferrals