The Federal Thrift Savings Plan

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1 Vertex Wealth Management, LLC Michael J. Aluotto, CRPC President Private Wealth Manager 1325 Franklin Ave., Ste. 335 Garden City, NY The Federal Thrift Savings Plan Page 1 of 7, see disclaimer on final page

2 The Federal Thrift Savings Plan What is the Federal Thrift Savings Plan (TSP)? The Federal Thrift Savings Plan (TSP) is a tax-deferred retirement savings and investment plan set up to help federal civilian employees and military personnel (as of October 9, 2001) save for retirement. The Federal Retirement Thrift Investment Board, an independent government agency, administers it. The TSP is a defined contribution plan. This means that employees and servicemembers are eligible to contribute at least part of their salary annually to the plan, and the government may match those contributions in full or in part. Contributions are invested and distributed to the employee or servicemember at retirement or when the employee or servicemember separates from government service, or distributed to the employee's or servicemember's survivors if the employee or servicemember dies. Who is eligible to participate in the TSP? Employees covered under the Federal Employees Retirement System ( FERS) are automatically enrolled in the TSP by the agency for which they work. Participants may file an election to make contributions to the plan at any time. Elections are effective no later than the first full pay period after they're received. Civil Service Retirement System (CSRS) employees are also eligible to contribute a portion of their pay to the TSP, but are generally not entitled to Agency Automatic (1 percent) Contributions and Agency Matching Contributions, as discussed below. Active-duty and reserve members of the Army, Air Force, Marine Corps, Navy, and Coast Guard, as well as uniformed members of the Public Health Service and the National Oceanic and Atmospheric Administration, can also participate by contributing a portion of their pay to the TSP. Contributions to a TSP account Federal employee's contributions You can generally contribute up to 100 percent of your basic pay to your thrift account each pay period in 2014, as long as your annual contributions don't exceed the Internal Revenue Code (IRC) elective deferral limit of $17,500. Your contributions reduce your gross income so that you pay less income tax on your earnings. All contributions must be made through payroll deductions. You can elect to contribute to the TSP at any time--there is no waiting period. You may also make Roth contributions to the TSP (see below). Caution: If you are a FERS employee hired (or a CSRS employee rehired) after July 31, 2010, you will be automatically enrolled the TSP, and 3% of your basic pay will be deducted from your paycheck each pay period and deposited in your TSP account, unless you make a contribution election to stop or change your contributions. Caution: If you participate in another tax-deferred plan, such as a 401(k) or 403(b) plan, your total elective deferrals to all of your plans cannot exceed the $17,500 limit (plus allowable catch-up contributions) in However, if you also participate in a Section 457(b) plan, your contributions to the TSP are not limited by any of your contributions to your section 457(b) plan. Tip: Military personnel who receive tax-exempt pay (i.e., combat zone pay) can also contribute some or all of the tax-exempt pay to the TSP. Such contributions will also be tax exempt. Thrift Savings Plan participants who are age 50 and older can make additional yearly "catch-up" contributions to their TSPs. These contributions can be made over and above the regular contribution limits. The purpose of this provision is to help older plan participants increase their savings as they approach retirement. Those who are age 50 and older can contribute an additional $5,500 to their TSPs in (The annual catch-up amount is adjusted annually for inflation.) Caution: Military personnel cannot make catch-up contributions from tax-exempt pay, incentive pay, special pay, or bonus pay. Page 2 of 7, see disclaimer on final page

3 Roth contributions Effective May 7, 2012, participants were allowed to designate all or part of their elective deferrals as Roth contributions. Roth contributions are made on an after-tax basis, just like Roth IRA contributions. Unlike pretax contributions to the TSP, there's no up-front tax benefit, but if certain conditions are met, your Roth contributions and earnings are entirely free from federal income tax when distributed from the plan. Separate accounts are established within TSP (the "Roth accounts") to track each employee's Roth contributions and any gains or losses on those contributions. The taxation of distributions from the Roth account is also determined separately from any other plan dollars. Government's contributions If you are covered under FERS, the government contributes an amount equal to 1 percent of the basic pay you earn each pay period to your thrift account whether you contribute a portion of your compensation to the plan or not. These contributions are referred to as Agency Automatic (1 percent) Contributions. If you are covered under FERS, and elect to contribute a portion of your compensation to the plan, you will also receive Agency Matching Contributions. When you become eligible, your agency will match your contributions up to 5 percent of the basic pay that you contribute each pay period. The first 3 percent of basic pay you contribute is matched dollar-for-dollar, and the remaining 2 percent is matched 50 cents on the dollar. Example(s): Naoko was employed under FERS, and a TSP account was automatically opened for her. Her basic pay each pay period was $2,000. Each pay period, the government contributed $20 (1 percent of her basic pay) to her investment account. Naoko contributed $60 (3 percent of her basic pay) each pay period. The government matched her contribution dollar for dollar, so at the end of the year (26 pay periods) Naoko had $3,640 in her TSP account. Tip: If you are an employee covered under CSRS or are a servicemember, the government generally doesn't contribute anything to your plan. Caution: Although you are always vested in contributions you make to the plan and Agency Matching Contributions (as well as any attributable earnings), most FERS employees are vested in Agency Automatic (1 percent) Contributions only after they have completed three years of federal service. This means that if you leave federal service before you become vested, you won't be entitled to receive any of the automatic contributions or their earnings in your account. However, if you die before becoming vested, all money in your TSP account will be automatically vested, and your designated beneficiary will be entitled to receive all funds in your account. TSP investment options You can invest any percentage of future contributions to your account to a TSP "lifecycle" L Fund, or to any of the five individual funds available. The TSP L Funds are designed for individuals who don't feel comfortable selecting or managing their own investment choices. You simply select the L Fund that's appropriate for your time horizon. The L Fund that you select invests in a mix of the individual funds available under the TSP, and adjusts the mix to reflect a lower tolerance for risk as your investment time horizon approaches. Instead of an L Fund, you can also invest directly in any or all of the five individual funds offered under the TSP: the Government Securities Investment Fund (G Fund), the Fixed-Income Index Fund (F Fund), the Common Stock Index Investment Fund (C Fund), the small Capitalization Stock Index Invest Fund (S Fund), and the International Stock Index Fund (I Fund). Tip: Although you can contribute either a percentage of your pay each pay period or a fixed dollar amount to the TSP, you cannot specify that you want a particular dollar amount to go to an individual fund. You can only state what percentage of your contribution you want to go to each fund. Page 3 of 7, see disclaimer on final page

4 Distribution of TSP account funds In-service withdrawals Participants can take a one-time age-based withdrawal from the TSP upon reaching age 59½. All or a portion of the participant's vested account balance may be withdrawn at that time. If a participant elects to take a partial account withdrawal, the participant will not be eligible for a partial account withdrawal upon separating from service. Participants can also make in-service withdrawals in cases of financial hardship. Specific requirements and limits apply, and each time a participant takes a hardship distribution, the participant is barred from making another hardship distribution for a period of 6 months. In addition, no contributions can be made to the TSP for a 6 month period. Caution: Participants should consider carefully the consequences of an in-service distribution. Distributions from your pre-tax account are subject to federal income tax, and an additional 10 percent penalty tax will generally apply to distributions made prior to age 59½. The taxation of in-service withdrawals from an employee's Roth 401(k) account depends on whether the distribution is a qualified or nonqualified withdrawal (discussed in more detail below). Consideration should also be given to the overall depletion of the participant's retirement savings. Caution: If you are married, your spouse must be notified of any request for an in-service distribution, and in most cases, must consent. Partial withdrawals upon separation If you separate from service, you can take a distribution of $1,000 or more from the TSP, leaving the remaining balance in your account until you decide to withdraw it. You can take only one partial distribution from the account. If you had previously made an aged-based withdrawal after reaching age 59½, you do not have this option. Full withdrawal upon separation When you separate from service, you can elect to withdraw your full TSP account in a single "lump-sum" distribution, in a series of specified payments, or through the purchase of an annuity. You can purchase three types of annuities: (1) an annuity that is paid to you during your lifetime (single life annuity); (2) an annuity that is paid to you while you and your spouse are alive, then paid to the surviving spouse for the rest of his or her life after one of you dies (joint life with spouse annuity); or (3) an annuity that is paid to you while you and a person chosen by you (with an insurable interest in you) are alive, then paid to the survivor (beneficiary) for his or her life after one of you dies. You can also choose certain payment options, depending on the type of annuity you choose, such as a cash refund feature, an increasing benefits option, or a 10-year certain feature. However, if you are a married FERS participant, you must elect a joint life with spouse annuity with a 50 percent survivor benefit, level payments, and no cash refund feature, unless your spouse consents to another annuity option. Example(s): Cesar retired from government service at age 62. Over the years, he had contributed 3 percent of his base pay to his TSP account. The government had matched those contributions dollar for dollar and had also contributed an additional 1 percent of Cesar's base pay to his account. By the time Cesar retired, he had accumulated over $70,000 in his thrift account. He elected to receive an annuity that paid him $575 a month for the rest of his life. Tip: You must have at least $3,500 in your account at the time the TSP uses the money to purchase an annuity; if you don't, you will receive a lump-sum payment. Annuity payment amounts Several factors determine how much your monthly annuity payments will be. These factors are how large your account balance is, the interest rate at the time the TSP purchases your annuity, the performance of your investment fund, your age (and your joint annuitant's age if applicable), and the annuity option you elect. The TSP website ( has a calculator you can use to project your future account balance, and you can view tables of approximate annuity payments. Page 4 of 7, see disclaimer on final page

5 Tax considerations Income tax Money you contribute to your TSP account on a pre-tax basis is taken out of your pay before federal (and most state) taxes are calculated, and investment earnings are tax deferred. Therefore, all of the money in your TSP pre-tax account is taxed as ordinary income when you receive it. Tip: If you were born before 1936, and receive your entire TSP account balance in a single tax year (a "lump sum distribution") and meet other requirements, you may be able to use a special 10-year tax averaging option to figure your tax. Income Tax--Roth Contributions In general Because your Roth contributions are made on an after-tax basis, there is no up-front tax benefit. They're included in your gross income at the time you contribute to the TSP. And because they're made on an after-tax basis, your Roth contributions are tax-free when distributed from the plan. Investment earnings on your Roth contributions grow tax-deferred while they remain in the plan. Whether they're subject to tax when distributed depends on whether the distribution is qualified or nonqualified. Qualified distributions If receive a qualified distribution from your Roth account, the entire amount distributed, both the Roth contributions and investment earnings, is totally free from federal income tax. A qualified distribution is a payment from your Roth account that meets both of the following requirements: The payment is made after you turn age 59½, become disabled, or die, and The payment is made after the end of the five-year period that starts with the year you make your first Roth contribution to the plan Example(s): Nicole makes her first Roth contribution in December, is the first year of Nicole's five-year waiting period. The five-year waiting period ends on December 31, Nonqualified distributions If a payment doesn't satisfy the conditions for a qualified distribution, the portion of the payment that represents the return of your Roth contributions will still be tax-free, but the portion of the payment that represents earnings on those contributions will be subject to income tax and a potential 10 percent premature distribution tax (unless an exception applies). A distribution that's made before the five-year waiting period has elapsed will always be a nonqualified distribution. A distribution that's made prior to age 59½, disability, or death (for example, a distribution to upon your termination of employment before attaining age 59½) will also always be a nonqualified distribution. Tip: IRS proposed regulations provide that each distribution from a Roth 401(k) account is deemed to consist of a pro-rata share of an employee's Roth contributions and investment earnings on those contributions. Early withdrawal Any taxable amount paid to you from your TSP account before you reach age 59½ may be subject to a 10 percent premature distribution tax (in addition to the ordinary income tax that you pay on the TSP distribution). However, this additional tax does not apply in certain situations, including the following: You separate from government service during or after the calendar year in which you reach age 55 Page 5 of 7, see disclaimer on final page

6 You choose to receive your account balance as an annuity or in monthly payments based on your life expectancy You retire on disability The payments are made because of death Saver's tax credit (tax credit for IRAs and retirement plans) Certain low- and middle-income taxpayers qualify for the saver's tax credit (also known as the tax credit for IRAs and retirement plans). If you participate in the TSP and meet the income requirements, you may be eligible for a tax credit of up to $1,000 on your federal income tax return for each year you participate in the plan. Questions & Answers Can you borrow money from your TSP? You may be able to borrow money from your account. However, you'll be expected to repay the loan right away if you leave federal service. The interest you pay will be the G Fund rate in effect at the time your loan application is received. If your loan is considered a general purpose one, you won't be required to document or specify the purpose of your loan. Documentation is required for residential loans only. For more information, contact your personnel office. Can you roll over an individual retirement account to your TSP? Whether you are an active or separated federal employee, you can roll over (i.e., transfer) money from a qualified retirement plan or a traditional IRA to your existing TSP account. Money that you are rolling over must be considered an "eligible rollover distribution" under the IRC. If you are separated from service, you can still roll over money to your TSP account unless you have already made a full withdrawal of your account or are receiving monthly payments. If you are considering a rollover, you should check with the administrator of the plan from which you wish to transfer the money (or your tax advisor) to ensure that the funds are eligible for rollover. Caution: Rollovers consist only of pretax money. They will be subject to income tax when they are eventually paid to you from your TSP account. Can you roll over a distribution from your TSP to another plan? If you (the plan participant) receive an eligible rollover distribution from your TSP, you may roll over all or part of it to an IRA or to another qualified retirement plan, tax-sheltered annuity plan (Section 403(b) plan), or Section 457 plan. (Special rules apply to TSP distributions received by your beneficiaries following your death.) Special rules apply to rollovers from your Roth account. Page 6 of 7, see disclaimer on final page

7 Securities offered through First Allied Securities, Inc. A Registered Broker/Dealer Member FINRA/SIPC Advisory Services offered through First Allied Advisory Services, Inc. A Registered Investment Adviser Vertex Wealth Management, LLC Michael J. Aluotto, CRPC President Private Wealth Manager 1325 Franklin Ave., Ste. 335 Garden City, NY [email protected] Page 7 of 7 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014