- A Thrift Savings Plan (TSP) is a retirement program open to most federal employees.
- TSP participants can contribute pre-tax earnings from their pay and get matching funds from their employers.
- There are a variety of investment options available designed to suit employees’ comfortability with managing fund and individual goals.
The federal government offers a different option to its employees to save for retirement than private companies. The Thrift Savings Plan (TSP) is very similar to popular plans found in the private sector, allowing for pre-tax contributions, employer matches, and long-term earning potential in a variety of funds. But it has some unique options that can make it an attractive benefit for signing on to a government job.
Here’s a closer look at how TSPs work and what you need to know before opting to participate in one.
What is a Thrift Savings Plan (TSP)?
A TSP is a retirement savings program for most people who work part-time or full-time for the federal government at an eligible pay status. More specifically, TSPs are available to:
- Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS) employees
- Members of a uniformed service, either active duty or part of the Ready Reserve
- Civilians in some additional government service categories
Like 401(k) and 403(b) plans offered to those who work in the private and nonprofit sectors, TSPs give you the ability to divert earnings into investments that can grow into a tax-deferred nest egg for retirement. Generally, eligible employees are automatically enrolled in a TSP with 5% of their salary allocated into an individual plan account. This is the minimum you’re required to contribute in order to receive a full match from your employer.
“[Federal employees] are immediately vested into the TSP,” says Samuel Eberts, junior partner and financial advisor with Dugan Brown. “Even if they separate from service shortly after joining, they will be able to keep any contributions, most of the government match (if applicable) and any growth associated with the account. Additionally, military employees who are part of the blended retirement system (BRS) and FERS employees both receive matching contributions from the government.”
Quick tip: If you’re not sure if you’re enrolled in a TSP, check with your organization’s plan administrator. Most agencies automatically enroll new hires and choose both a 5% salary contribution to be invested in a Lifecycle Fund (discussed below). You have the option to change these allocations at any time.
There are two types of TSPs that may be available to you: traditional TSPs and Roth TSPs.
- A traditional TSP uses pre-tax contributions from your salary and employer matching to fund the account. You don’t pay taxes on those investments and earnings until you begin to take distributions, usually after you reach retirement age.
- A Roth TSP contains post-tax contributions, which will not be taxable again when you withdraw that money. You may be able to participate in one or both types of TSPs.
Understanding how thrift savings plans work
TSPs are defined contribution plans that allow you to allocate a portion of your pre-tax pay to an investment fund, usually through payroll deductions. Your employer may also elect to contribute to your account, increasing the total amount that is available for investment.
For 2021, you can contribute up to $19,500 to both traditional or Roth TSP options if you’re younger than age 50. This will increase to $20,500 in 2022. If you are older or will turn 50 this year, you can make an additional $6,500 in catch-up contributions.
Quick tip: You can transfer tax-deferred funds from individual retirement arrangements (IRAs) and other kinds of employer-sponsored plans into a traditional TSP. If you have a Roth TSP, you can add qualified and non-qualified balances from other kinds of Roth accounts.
The annual limit for additional contributions for 2021 is $58,000 and will increase to $61,000 next year. These include employee contributions that are tax-deferred, after-tax, and tax-exempt, as well as matching and automatic 1% contributions from your agency or branch of service. Catch-up contributions are not counted in this limit.
Because TSPs are designed to help you save for retirement, you’ll have to wait until you’re at least 59 ½ before you can begin to take withdrawals without penalty. But there are a few exceptions to this, such as permanent disability or death. You may be able to take distributions early in certain circumstances, such as financial hardship, but may have to pay a 10% penalty in addition to taxes for the amount withdrawn. TSP withdrawals are required once you turn 72.
You won’t pay taxes on the contributions or earnings in a traditional TSP until you begin taking distributions, which can start once you turn 59 ½. And distributions are taxed as regular income. However, you can also roll over distributions into another type of retirement account and further defer your tax liability. If you choose to put the money into a Roth IRA, you can pay the income taxes on the distribution now. When you take withdrawals from the Roth IRA, they will be tax free.
With Roth TSPs, you don’t pay taxes on the money you directly contributed to the plan. You also will not pay tax on the earnings gained when making a qualified distribution. For a distribution to be considered qualified, you have to be at least 59 ½ and at least five years must have passed since your first Roth contribution was made.
If you need to access funds from your TSP but don’t want to take an unqualified distribution, pay penalties, or be liable for the taxes, you may be able to take out a loan. There are two types of loans available to TSP participants: general purpose and residential.
“General purpose loans can be used for any purpose and have a repayment term of between 1 and 5 years,” says Molly Ford-Coates, an Accredited Financial Counselor and the founder and CEO of Ford Financial Management. “An example of a residential loan is to put a down payment on a house. These have a repayment term between one and 15 years. All loans must be repaid. If you separate or retire before the loan is paid and do not repay it within 90 days, it will count as taxable income for you.”
TSP loans have a list of eligibility qualifications, incur interest charges at a rate of 1.625% or the current rate for a G Fund (discussed below), and an administrative fee of $50 that is deducted from the total amount borrowed. You must borrow at least $1,000 and up to 50% of your vested balance, the amount of your direct contributions to the account, or $50,000 minus your highest outstanding loan balance – whichever amount is smallest.
How are TSP funds invested?
TSPs offer participants two options for investing their funds. Lifestyle funds are a mix of 10 funds that invest in stocks, bonds, and government securities. This option is designed to make investing easy for those who have a long time before retirement or are not experienced with managing funds.
“Lifecycle funds are a diversified combination of the funds that you can invest in,” says Shawn Plummer, CEO of The Annuity Expert. “The funds are allocated automatically based on your age and the date you plan to retire. If you are younger, the investments would be more aggressive, but the allocations would gradually be more conservative as you near your retirement age.”
If you are more comfortable making independent decisions as to how your money is invested, TSPs offer individual funds. You have five funds to allocate your retirement dollars into, each of which have specific approaches, returns, and purposes.
“These funds are split up by asset class, and you can choose which funds you would like to invest in and what percentage you would like to allocate to each,” says Brandon Steele, CFP, ChFC, and co-founder and CEO of Mainsail Financial Group. “If you go this route, there are no automated allocation changes as you near retirement. If you did want to adjust as you get closer, this would need to be done manually.”
Individual fund options include:
- Government Securities Investment Fund (G Fund): This is a low-risk fund that aims to preserve capital and deliver returns on-pace with short-term securities from the US Treasury. Payment of both principal and interest with this fund is backed by the government.
- Fixed Income Index Investment Fund (F Fund): This is a low- to medium-risk fund that follows the Bloomberg Barclays US Aggregate Bond Index performance. Investments in this fund are made solely in bonds and are subject to the risks associated with those types of securities, such as defaults on principle and interest payments.
- Common Stock Index Funds (C Fund): This is a medium-risk fund that matches the performance of the S&P 500 Index. Your dollars in this fund are invested in securities offered by large and medium-sized companies. Investing in this kind of fund can help offset risk if you also participate in an F Fund.
- Small Cap Stock Index Investment Fund (S Fund): This is a medium- to high-risk fund that follows the performance of the Dow Jones US Completion Total Stock Market Index. Securities in this fund come from small- to mid-sized US companies and offer an opportunity to diversify stocks in conjunction with C and I Fund investments.
- International Stock Index Investment Fund (I Fund): This is a high-risk fund that matches the performance of the MSCI EAFE Index. Investments in this fund are in non-US companies. Gains and losses in this kind of fund are tied to the value of the US dollar in comparison to the currencies in the index countries.
Pros and cons of TSP plans
There are a lot of advantages to participating in a TSP, including building a solid retirement fund through a variety of diversified investments. Like with any investment tool, there are also drawbacks you need to consider. Here is a look at some of the pros and cons for TSP plans:
The financial takeaway
The TSP is a solid choice for saving for your post-retirement future if you’re a government employee. It works very much like a 401(k) or 403(b) and gives you a lot of opportunity to control your investments, making it familiar for those who may be moving from the private sector into public service.
Because many agencies automatically enroll new hires in a TSP, it’s important to know if you are participating and where your money is being invested. If you’re an active participant, it’s always worth talking to your plan administrator to make sure you understand what options are open to you so you can make informed choices about your investments.
Speaking with an independent financial advisor can also be a good idea. They can help you come up with an actionable plan for how much you will defer into your TSP, advise whether the traditional, Roth, or a mix of the two options is right for your goals, and provide perspective on the long-term and short-term benefits of participating in a TSP.
A guide to IRAs: Tax-advantaged investing accounts that help you save for retirement 403(b) vs. 401(k): What’s the difference? Traditional IRA vs. Roth IRA: What’s the difference? What’s the difference between a pension and a 401(k)?