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President Signs Tobacco Bill Implementing TSP Changes

Tuesday, June 23, 2009

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President Barack Obama signed the Family Smoking Prevention and Tobacco Control Act this week. The tobacco bill has been kicking around for a couple of years now and, while the primary focus is on giving the Food and Drug Administration regulatory authority over tobacco, the bill also has a number of provisions that impact the federal government's Thrift Savings Plan.

Here is what the new bill will do for the TSP:

First, the legislation will enable creation of a Roth plan. Under this plan, a TSP participant will be able to invest after-tax salary into an account that will grow without any additional tax liability on future earnings. This is different from the current TSP in that income tax is paid when money is withdrawn from the TSP as the initial investment was made from pre-tax dollars.

The Roth option may not be available in the TSP for another 1-2 years so don't plan on using it right away.

Second, new federal employees will be automatically enrolled in the TSP. They will be able to opt out and get a refund within 90 days if they do not wish to participate. New federal employees would be automatically enrolled in the TSP's G fund. The government would match the employee's contributions up to 5 percent of salary. The matching contributions would start immediately 

Third, A survivor benefit would allow spouses of deceased TSP participants to maintain TSP accounts.

Fourth, the legislation creates a mutual fund option that would allow participants to invest their retirement money in private-sector mutual funds.

There is no guarantee that this option will be implemented by the thrift board but it creates the authority to do so in the future. The Federal Retirement Thrift Investment Board would select the mutual funds that would be available to plan participants and extra costs would be paid by those that selected these mutual funds.

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