What Is the Thrift Savings Plan?

The Thrift Savings Plan is a retirement savings and investment account for federal government employees. Also known as the TSP, the Thrift Savings Plan offers similar features and benefits to a private sector 401(k) plan, but only for government workers.

The TSP offers three primary features:

— Tax benefits.

— Automatic contributions through payroll deduction.

— Employee matching contributions.

What Is the Thrift Savings Plan?

The Thrift Savings Plan is a tax-preferred retirement savings and investment vehicle that enables federal employees to steer a portion of their regular income to long-term savings. Like many 401(k) plans, the TSP provides matching employer contributions and regular tax savings. “The matching contribution feature may be the biggest benefit of all,” says Stephanie McCullough, founder of Sofia Financial in Berwyn, Pennsylvania.

The Thrift Savings Plan was rolled out in 1986 as part of the Federal Employees Retirement System Act of 1986, and was structured to offer similar benefits to a 401(k) plan. “Federal employees can contribute to a tax-advantaged retirement account through a TSP,” says Levon Galstyan, a certified public accountant at Oak View Law Group in Glendale, California. “There are traditional TSPs, which are taxed when money is withdrawn, and Roth TSPs, where taxes are paid on contributions, but not on earnings, similar to a Roth IRA.”

[Read: How Much Should You Contribute to a 401(k)?]

Who Is Eligible for the Thrift Savings Plan?

The vast majority of federal employees are qualified to take part in the TSP. “Any TSP participant must be enrolled in an approved retirement system, as well as be either a civilian employee or a member of the uniformed services who is currently employed by the federal government or in a paid status to participate, whether full or part time,” Galstyan says.

The most common ways to become eligible to participate in the TSP are as a Federal Employees’ Retirement System worker, a Civil Service Retirement System worker or as a member of the U.S. uniformed services such as the Army, Navy, Marine Corps, Air Force or Coast Guard. “If a federal government employee fits any of the following criteria, that employee is eligible for the Thrift Savings Plan,” Galstyan said.

How Much Should You Put Into the TSP?

If you begin a federal job after October 1, 2020, you may automatically have 5% of your base salary deducted from your paycheck and deposited in a TSP account, unless you opt out or change the amount. The TSP generally provides a dollar-for-dollar match on the first 3% of pay saved, a 50% match on the next 2% of pay contributed to the account and an additional 1% contribution regardless of the amount saved. “Even if a FERS employee does not contribute to their TSP, they still receive an automatic 1% contribution from their agency,” says Samuel Eberts, a partner and financial advisor with Dugan Brown, an investment services firm in Dublin, Ohio.

You can also elect to contribute more than 5% of your pay to the TSP up to the annual contribution limit. Workers age 50 and older can make additional catch-up contributions. “While in the TSP, like other qualified plans offered by employers, the contribution maximum is up to $20,500, with a $6,500 catch-up benefit to plan participants 50 and older,” Eberts says. “This allows for even more compounded growth over time in a tax-incentivized account.”

[See: How to Pay Less Tax on Retirement Account Withdrawals.]

What Are the TSP Investment Options?

The Thrift Savings Plan offers a limited range of investment options, including traditional stock and bond funds and life cycle funds that adjust asset allocations as you advance in your career.

TSP fund options include:

— The Government Securities Investment (G) Fund.

— The Common Stock Index Investment (C) Fund.

— The International Stock Index Investment (I) Fund.

— The Fixed Income Index Investment (F) Fund.

— The Small Cap Stock Index Investment (S) Fund.

— Specific lifecycle (L) funds.

The TSP provides only a small selection of investment choices. “Investment options are limited, with five core funds and several lifecycle funds that allocate among those core investments based on a target retirement year,” says Daniel Ruppel, a senior financial planner at TIAA in Denver. “Consequently, TSP provides limited options for investors who may want to take a more hands-on approach to managing their retirement funds, including exploring investment options beyond traditional, broad market indexes.”

[See: 9 Ways to Avoid the 401(k) Early Withdrawal Penalty and Other Fees.]

Differences Between a Thrift Savings Plan and a 401(k)

A Thrift Savings Plan has the same tax and savings benefits as a 401(k), and the same contribution limits. Both a TSP and a 401(k) also offer catch-up contributions to those over age 50. “Also, the TSP offers matching contributions, which most 401(k) plans also have,” Eberts says. “The Rule of 55, which is an IRS code that allows separated participants who leave service in or after the year they turn 55 years old to take penalty-free withdrawals, also applies to the TSP.”

However, the TSP doesn’t fall under the same regulatory rules as 401(k) plans. “The major difference between the TSP and a 401(k) is that the TSP is a government-sponsored plan and does not fall under ERISA laws,” Eberts says. The TSP is only available for federal government employees, while 401(k) plans are for private sector employees. 401(k) plan features also vary widely among different employers, including the 401(k) match amount, vesting schedule, fees and variety of investment options.

More from U.S. News

12 Ways to Avoid the IRA Early Withdrawal Penalty

10 Reasons to Save for Retirement in a Roth IRA

10 Tax Breaks for People Over 50

What Is the Thrift Savings Plan? originally appeared on usnews.com

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