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.
“Thrift retirement plans are retirement savings and investment plans designed specifically for federal employees and uniformed service members,” says Michael Ryan, a retired financial planner and founder at MichaelRyanMoney.com. “If you qualify, think of TSPs as a way to build your financial future.”
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, “including tax advantages, caps on contributions and requirements for minimum withdrawals in retirement,” says Michael Ashley Schulman, a partner and chief investment officer at Running Point Capital Advisors in El Segundo, California. “Participating in the TSP offers federal government employees the chance to save a portion of their income for retirement, receive agency contributions that match their savings, and reduce their current tax obligations.”
The 2023 Thrift Savings Plan contribution limit is $22,500, which applies to both traditional and Roth contributions made by an employee during the calendar year. If you’re age 50 or older (or will be turning 50 in 2023), you may also make TSP catch-up contributions of up to $7,500.
[READ: How Much Money to Have Saved for Retirement by Age 40]
Who Is Eligible for the Thrift Savings Plan?
Thrift Savings Plans are available to federal employees, including those working for executive branch agencies, the Postal Service and Congress, as well as members of the uniformed services, such as the Army, Navy, Air Force, Marine Corps, Coast Guard and Public Health Service.
“Selected members of the Ready Reserve, such as the National Guard and Reserves, may also be eligible,” says Loretta Kilday, a spokesperson at Debt Consolidation Care, a personal debt reduction advisory platform. “Additionally, some civilian employees of the uniformed services, like the Department of Defense, may qualify for TSP participation.”
Advantages of Thrift Savings Plans
Thrift Savings Plans offer great features and perks for government employees. “First off, you get to make tax-deferred contributions, meaning you’ll enjoy an immediate tax break on your savings,” Ryan says. “If you want even more tax flexibility, you can choose the Roth option for tax-free withdrawals after retirement.”
The TSP also charges low fees compared to other retirement plans, Ryan notes. “You also get sweet matching contributions for federal employees with up to 5% of your basic pay that could be matched by your employer.”
Here’s a look at the primary benefits of investing in a Thrift Savings Plan:
— Tax-advantaged savings: Contributions are made with pretax income. “That reduces current taxable income and allows for tax-deferred growth,” Kilday says.
— Employer matching: Select TSP participants can get employer-matching contributions, which can accelerate retirement savings.
— Low fees: TSPs usually have low administrative fees, which helps maximize investment returns. Administration costs, for example, cost about 0.068% of fund assets.
— Diversified investment options: TSP investors can select from various investment funds, including government securities, stocks and bonds.
— Portability: TSPs can be rolled over into other retirement accounts when a participant leaves federal employment.
— Retirement income: TSPs offer multiple withdrawal options, which “enables retirees to convert their savings into a steady income stream during retirement,” Kilday says.
[READ: How to Pay Less 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.
“Life cycle funds are similar to target-date balanced funds that adjust their equity and bond weightings over time to become more conservative,” Schulman says. “Life cycle fund options currently range from 2025 to 2065 as well as an income fund choice.”
TSPs also offer individual TSP funds in five focused yet diversified fund choices to choose from: a U.S. government securities fund, a U.S. fixed income (bond) fund, a U.S. large-cap stock index fund, a U.S. small-cap stock index fund, and an international stock index fund.
Thrift Savings Plan fund options include:
— G Fund: Government Securities Investment Fund (a stable value fund).
— F Fund: Fixed Income Index Investment Fund (a bond fund).
— C Fund: Common Stock Index Investment Fund (a large-cap stock fund).
— S Fund: Small Cap Stock Index Investment Fund (a small-cap stock fund).
— I Fund: International Stock Index Investment Fund (international stock fund).
— L Funds: These are life cycle (or target-date) funds, which automatically adjust asset allocation based on the plan holder’s projected retirement date.
“Additionally, if a qualified plan participant meets certain eligibility requirements and pays some additional fees, one can choose to invest in public mutual funds,” Schulman adds.
In 2022, TSP rolled out the “Mutual Fund Window,” which allows plan participants to transfer cash from a TSP account through the mutual fund window and open a separate investment account offered by an approved fund provider. Once the mutual fund account is up and running, the plan participant may buy, sell and exchange mutual funds.
“This allows TSP participants to choose from more than 4,000 mutual funds of all types,” says Lisa Whitley, a retired federal government employee, TSP account holder and financial planner in Washington, D.C. “TSP investors should be aware that some of these funds are actively managed with much higher expense ratios than traditional TSP funds, and that TSP levies various trade and administrative fees for using the Mutual Fund Window.”
What Is the Difference Between a TSP and a 401(k)?
TSP and 401(k)s share much of the same retirement planning vehicle DNA, but there are some variables.
“In most ways, they operate identically both during the accumulation phase and later when the federal employee is retired,” Whitley says. “This is especially true now that TSP allows investors to invest beyond the traditional mutual funds, and expense ratios for widely available 401(k) index mutual funds and ETFs have narrowed the cost advantage that TSP used to enjoy.”
In recent years, TSP has made it easier for retirees to take distributions flexibly, removing one of the pain points that annoyed many participants.
“However, there remains an important difference between 401(k)s and TSPs that retired federal employees should be aware of,” Whitley adds. “When taking distributions, a TSP investor who is invested in multiple funds can’t specify the source of the distribution. All distributions are taken pro rata from the entire portfolio.”
Retirees who are seeking to implement the retirement bucket strategy “may not be happy with this restriction,” Whitley notes.
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What Is the Thrift Savings Plan? originally appeared on usnews.com
Update 07/06/23: This story was published at an earlier date and has been updated with new information.
