What is a Thrift Savings Plan?
A retirement plan is an integral part of long-term financial stability, as it allows you to set aside a portion of your income to grow gradually over time. A government employee Thrift Savings Plan, more commonly referred to as a TSP, is a retirement and investment plan, similar to a 401(k), designed specifically for government employees and members of the U.S. military, allowing them to invest in their future throughout the course of their career.
TSP Contributions for Federal Employees
Once you have enrolled and made your initial contribution, the amount of your future contribution is completely up to you, and you can easily change or stop those contributions using an electronic payroll system. The only exception is members of the US Public Health Service Commissioned Corps, who are still required to use a paper form system.
The TSP offers both traditional and Roth options for contributions, which determine how those funds are taxed when withdrawn in retirement. With a traditional TSP, contributions are taken out of your gross earnings, before those monies are taxed. This results in a reduction to taxable income in the year a contribution is made. However, when you withdraw your investment in retirement, the contributions and earnings of your investment will be taxed as ordinary income in retirement.
Contributions to a Roth TSP do not receive a tax deduction when a contribution is made. These funds, will instead, grow tax-free and distributions will not be subject to tax if made as qualified retirement withdrawals.
There are several types of contributions. The regular employee contribution is the amount you have taken out of each check and deposited directly into your TSP. This amount will stay the same each check until you change the designated amount, stop the contributions, or reach the maximum amount as determined by the IRS. Automatic contributions refer to the 1% match your employer or service agency will make even if you are not contributing.
Matching contributions are those made by your employer. If you have a Federal Employee Retirement System (FERS) TSP or a Blended Retirement System (BRS) TSP, you are eligible for the automatic contribution; plus an additional 4% match depending on how much you contribute.
For those age 50 and above, you can also make catch-up contributions. This allows you to make additional contributions, beyond the regular employee-deferral limit.
IRS contribution limits affect the amount you are allowed to contribute each year, whether it be through regular contributions or catch-up contributions. The limits for 2023 were $22,500 for regular contributions and $7,500 for catch-up contributions. The Annual Additions Limit, which refers to the total amount of contributions to a TSP (employee + employer contributions), was $66,000 for the year.
In many cases, a good goal is to maximize your TSP contribution each year. This will also ensure you are receiving the full employer-match, as well. It is also important to take advantage of the opportunity to increase your contribution with catch-up contributions once you reach 50 so you can make that final push toward retirement.
TSP Investment Options and Strategies
When you participate in a TSP, you have three investment options to choose from: Individual TSP Funds, Lifecycle Funds, and the Mutual Fund Window.
- Individual TSP Funds consist of five funds (G, F, C, S, and I funds). The F, C, S, and I funds are diversified baskets of assets similar to an index mutual fund. The C fund invests in large US stocks. The S Fund invests in small US stocks. The I Fund invests in international stocks, and the F fund invests in bonds. The G fund operates similar to a savings account where the principal value does not fluctuate and interest is credited based on the short-term instrument the fund invests in.
- There are ten Lifecycle Funds investments to choose from that are made of a combination of the available Individual TSP Funds. These funds attempt to provide an appropriate risk-return profile for the fund based on a planned retirement year.
- TSP participants that meet certain criteria and are willing to pay the associated fees are able to invest part of their TSP portfolio in a mutual fund window.
Thus, TSPs work very similarly to other retirement plans such as traditional 401(k) plans and Roth IRAs. While the federal employee Thrift Savings Plans are the option created specifically for government and military employees, the strategies are similar and the end goal is the same.
It is, however, important to understand the difference between two key investment strategies—compound earnings and dollar-cost averaging. With compound earnings, you allow your initial investment to grow, then allow those earnings to continue to grow as well. This allows your investment to continuously gain momentum, constantly building on what you have already earned.
With a dollar-cost averaging strategy, you are simply taking a disciplined approach to investing by consistently making the same investment at regularly scheduled intervals rather than trying to time the market. This latter approach is the strategy employed with a TSP.
TSP Allocation Recommendations
The allocation that is right for you will change depending on your age, time with the government, personal spending habits, goals for retirement, and more. However, there are a few pieces of general advice that can be considered.
- Those early into a career usually have more capacity to take on investment risk and be aggressive with their TSP. The idea is younger participants may have more time to recover from investment losses. The C, S, and I funds are generally more aggressive investments compared to the F and G funds.
- If you are nearing retirement, it may make sense to allocate your TSP investments in a more conservative manner. The F and G funds historically have offered more stability in value, so larger allocations to these funds may be more appropriate at this lifestage.
Managing Your TSP Account
As with any long-term investment account, proper management is the key to success. This means understanding some important aspects of the TSP that could affect your long-term investment.
- If you choose to use the individual TSP funds (C, S, I, F, G), these investments will eventually drift away from the original targets you may have set for them. Periodically, you will want to check on the percentage of your TSP that is in each fund and consider a re-allocation if any investments are too large or too small a percentage of your account, relative to your needs.
- The Lifecycle funds will internal rebalance on their own – One of the perks of choosing these funds. They will also adjust their allocation from aggressive investments to more conservative investments as the fund’s retirement data approaches. However, your personal needs may change over time. This may mean the Lifecycle fund(s) you’ve chosen are no longer best suited to your investment objectives. Furthermore, your personal goals may not be consistent with the allocation provided by the fund that is closest to your retirement date. You may need to get under the hood of Lifecycle funds to choose the one that is best for you.
Withdrawing from Your TSP Account
- TSP withdrawal options include hardship withdrawals, in-service withdrawals, and post-employment distributions.
- Early TSP withdrawals often incur a 10% penalty if you are under the age of 59 ½ , except for those employees and service members who are exempt under the Secure 2.0 Act.
- TSP hardship withdrawals can only be made twice per year, cannot be repaid, and can only be taken if you are experiencing negative cash flow, have unpaid medical expenses or legal fees, or experience a casualty loss or a loss due to a qualifying natural disaster.
- Participants are eligible to take out a TSP loan when needed, which can be either a residential loan for buying a new home or a general purpose loan. Be aware that there are tax implications if you don’t repay the loan in full to your TSP before leaving your federal employment or military service.
- In retirement, TSP withdrawals made from pre-tax contribution sources will be treated as taxable income in the year of withdrawal.
- Checking your TSP balance is easy once you have enrolled and created an account on the government’s Thrift Savings Plan website. The site also has a Thrift Savings Plan calculator and tools to help you determine things like annuity payments.
TSP Special Considerations
There are some special considerations that you should be aware of with your TSP.
- Optimizing your TSP for life events is important to make sure your account is meeting your goals and needs. The best way to do that is by re-evaluating your TSP and your investment strategy whenever a major life event occurs, such as marriage or divorce.
- Changing careers. If you leave federal employment and have at least $200 in your TSP, you can leave the money where it is, but you won’t be able to make additional contributions. You also have the option to roll it over into another qualified retirement account with a new employer or to an IRA.
- Ensuring your TSP beneficiary designations are up-to-date is critical in ensuring your loved ones have access to your assets if something were to happen to you.
- There is a limit to the amount you can contribute to a retirement plan. Excess contributions to your TSP that surpass that limit must be refunded to you as taxable income.
- The Secure 2.0 Act allows for certain employees with 25 years or more of service to be exempt from the 10% early withdrawal fee commonly associated with retirement accounts. These employees include specified federal law enforcement officers, Customs and Border agents, federal firefighters, and air traffic controllers.
Pros and Cons of Thrift Savings Plans
These plans allow you to set aside pre-tax income so it grows at a continuous and gradual rate for your retirement. They also receive contribution matches from employers. In addition, if you find yourself in need of cash, you can consider a TSP loan or hardship withdrawal.
On the flip side, you are limited to the total amount you can contribute per year, and you will eventually pay taxes on your TSP funds when you withdraw them. In addition, participants have limited investment options to choose from.
While TSPs are a great investment option, other options are equally sound. Investing in an IRA may work better for some, as you will usually have a much larger universe of investments to select from.
TSP Financial Advisors
Finding the right financial advisor for your TSP is crucial, and selecting one that is familiar with TSPs and always acts as a fiduciary is a smart first step. This will ensure that they will be familiar with the specific rules and regulations of TSPs to let you make the best choices for your financial future.
Interview potential candidates to test their knowledge of TSPs, as well as their experience, and to determine if their investment strategy is in line with your own.
FAQS
Should FERS employees contribute more than 5% to a TSP?
Most FERS employees should aim to contribute at least 5% to be eligible for the maximum contribution match. More can be invested as long as the total amount does not exceed the IRS contribution limits.
Can a TSP be rolled over?
Yes, similar to a 401(k), a TSP can be rolled over into another eligible retirement plan or into an IRA.
Are TSPs taxable?
If you participate in a Roth TSP, your contributions are taken out of your paycheck after taxes. In a traditional TSP, your earnings are taxed as ordinary income once you make withdrawals in retirement. Automatic and matching contributions made by your employer will always be treated as pre-tax contributions and will be taxed upon withdrawal.
What TSPs invest solely in bonds?
The F fund and G fund invests solely in bonds.
How often can you take a TSP hardship withdrawal?
You can only take a TSP hardship withdrawal once every six months.
Can I use my TSP to buy a house?
Your TSP cannot be used to pay off a mortgage, but you can take out a TSP residential loan that can be used to buy or build a new home.
How can I get my old TSP statements?
You can access your statements by logging into ‘My Account’ on the Thrift Savings Plan website.
How can I increase my TSP contribution?
When you enroll in your TSP, your employer will provide you with access to an electronic payroll system that will allow you to make your changes electronically.
Where should I invest my TSP after retirement?
Once you retire, you can either withdraw your TSP balance, leave it in the plan to continue to grow, or roll it over to an IRA or a TSP annuity.
How do I calculate my TSP monthly payment?
The Thrift Saving Plan website features a convenient Thrift Savings Plan Calculator that helps you determine your annuity and monthly payments.