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What is a Thrift Savings Plan (TSP)?

What is a Thrift Savings Plan (TSP)?

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Catherine Hiles
Updated December 19, 2021
6 Min Read

There are numerous ways to save for retirement. A Thrift Savings Plan, or TSP, is a type of retirement investment account designed for federal employees and members of the military. It works similarly to 401(k) plans offered by private employers by allowing government workers to contribute some amount of their paycheck that is matched to a certain percentage by their employer, and then invested in stocks and bonds to build a retirement nest egg.

Let’s look at thrift savings plans in more detail.

How does a thrift savings plan work?

Introduced in 1986 as part of the Federal Employees’ Retirement System Act, the Thrift Savings Plan was designed to help eligible Americans save for retirement using a tax-advantaged investment account.

Sound familiar? That’s because a TSP works very similarly to a 401(k). The money comes directly from your paycheck and is invested in stocks and bonds to help you build a nest egg that you can access at retirement age (or before, if you have a financial emergency).

Also similarly to a 401(k), your employer (i.e. the government) will contribute a certain amount to help you reach your retirement goals if you are part of the Federal Employees Retirement System (FERS) or the Blended Retirement System (BRS). That essentially means free money that you can sock away for your golden years. 

People with FERS and BRS-associated TSPs will automatically get 1% of their salary paid into the account. After two years of employment, that goes up to 4%. After the first 1%, the government will match your contributions dollar for dollar on the next 3%, and will match your contributions at 50% for the next 2%. So if you contribute 5% of your income into your TSP, you’ll get it fully matched by your employer.

Who is eligible for a thrift savings plan?

TSPs are only available for people employed by a government agency or the military. But not all government employees are eligible. If you’re not sure whether or not you’re eligible for a TSP, it’s a good idea to contact your benefits office to find out.

Differences between Traditional and Roth TSP contributions

Just like a 401(k), a TSP is available either as a traditional account or a Roth account. The difference between the two is in how you pay taxes.

Traditional TSP

With a traditional TSP, your contributions are pre-tax. That gives you an immediate tax break by reducing your taxable income, but it means you’ll have to pay taxes on the money when you withdraw it at retirement.

Having a traditional TSP can mean you’re in a lower tax bracket than you otherwise would be, which means you’ll pay less taxes overall on your income. But if you expect to be in a higher tax bracket at retirement (which many people are), then you might end up paying more in taxes at withdrawal than you would pay on your contributions using your current tax bracket.

Roth TSP

A Roth TSP is taxed up-front, which means it won’t have an effect on your taxable income today, but when you come to withdraw the money at retirement you’ll have already paid taxes on it. That means your balance gives you a more realistic picture of how much money you’ll have at retirement, since you won’t have to factor taxes into the equation.

What are TSP contribution limits?

Like with other retirement investment accounts, a TSP has annual contribution limits set by the IRS. For 2021, the limit is $19,500. But if you’re older than 50, the limit increases to $26,000 per year to give you some time to catch up as you near retirement.

If you are able, it’s a good idea to max out your TSP each year by contributing up to the limit. The more money you add now, the more money will be waiting for you when you reach retirement age.

What types of funds do TSPs offer?

In total, there are five types of funds that TSP enrollees can choose from. They are the Government Securities Investment (G) Fund, the Fixed-Income Index Investment (F) Fund, the Common-Stock Index Investment (C) Fund, the Small-Capitalization Stock Index Investment (S) Fund, and the International-Stock Index Investment (I) Fund.

Four of these funds (F, C, S, and I) are managed by an independent government agency called BlackRock Institutional Trust Company, on behalf of the Federal Retirement Thrift Investment Board (FRTIB). 

When making the decision about which funds to invest in, you can choose from any of the five aforementioned funds, or you can choose a Lifecycle (L) fund that uses a preselected ratio of the five funds in which to invest your money.

Lifecycle fund

A Lifecycle fund automatically determines the ratios in which to invest in each fund based on your age. Younger investors will see a more aggressive mix of investments since they have enough time until retirement age to make up for any losses. Investing more aggressively can reward you with large returns; but it can also end up losing you a large chunk of money if the market dips.

As you get closer to retirement age, the Lifecycle fund will invest more conservatively. You’ll see less return on investment, but you’ll also be less likely to lose money due to a volatile market. This is a strategy recommended for retirement investment accounts in general.

Individual funds

A Lifecycle fund is hands-off and allows you to save for retirement without having to put in much work. That’s a tempting route to take, but if you’re able to do so it might be better to invest your money in individual funds.

Individual funds essentially hand you the reins to give you complete control over your investments. This can be intimidating if you don’t understand investing or aren’t comfortable with it, but it may be worth your while to do some research and put in the time to understand your retirement account. This will allow you to invest in companies that offer promise, match your values, and more.

FAQ (frequently asked questions)

Now that you understand what a TSP is, take some time to read through the following common questions about this unique type of retirement account.

Is a TSP the same as a 401(k)?

A TSP is not the same as a 401(k), though they do have similar characteristics.

A TSP is only available to government employees and is managed by an independent government agency. A 401(k) is offered by private employers to their associates and is managed by private brokers — whichever one your company chooses.

But when it comes to the way the two accounts work, they are very similar. You can make your contributions either before tax (traditional) or after (Roth), and your employer (in this case, the government) will match your contributions up to a certain percentage. You can choose to either automate your investments in a Lifecycle fund, or manage them manually by investing in individual funds. Both have annual contribution limits and required minimum distributions once you reach age 72. 

The main difference is the type of employee who can open a 401(k) vs. a TSP.

Is a TSP the same as an IRA?

An IRA is different from a TSP, although both account types offer you a way to save for retirement by investing your money.

While a TSP is offered by the government to its employees, an IRA is typically not affiliated with an employer. You can have a TSP and an IRA (in fact, it’s a good idea to have both account types if you can swing it). Each has its own contribution limits so you can max out both if you want to save as much as possible for retirement.

Are TSPs taxable?

One way or another, you’ll need to pay taxes on your TSP contributions. When you pay them depends on whether you choose a traditional or Roth TSP.

Traditional TSP contributions are made pre-tax, which gives you a tax break now but means you’ll need to pay taxes upon withdrawal.

Roth TSP contributions are made after tax, which means you’ve already paid all the taxes you’ll need to on them. That doesn’t give you a tax break now, but it means you won’t have to pay taxes on that money when you withdraw it at retirement.

Can a TSP be rolled over into an IRA?

Yes, you can roll over your TSP assets to an IRA. But it’s important to note what type of TSP you have (traditional or Roth) and what type of IRA you have. Rolling a traditional TSP into a traditional IRA, or a Roth TSP into a Roth IRA, means you won’t have to pay taxes on the money when you transfer it.

But if you roll a traditional TSP into a Roth IRA, you’ll be required to pay taxes on the rollover amount that you convert, so be prepared for that.

Do TSPs have early withdrawal penalties?

If you need to withdraw money from your TSP before the age of 59 1/2, you will be required to pay a 10% penalty. In general, it’s not recommended to withdraw money from a retirement account before retirement. Not only will you have to pay that hefty penalty, but you’ll also end up with less money growing in your account to set you up for a successful retirement.

Summary

If you’re employed by the government, it’s a smart idea to enroll in a TSP to help save for retirement. If possible, try to contribute at least 5% to get the entire match from the government, and try to contribute close to the annual limit assigned by the IRS. To learn more about what specific options are available to you, contact your employer’s benefits department.

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