The Thrift Savings Plan (TSP) is a defined-contribution plan for federal employees for retirement-saving purposes. Those who are in the federal civil service or are federal retirees participate in it. Members of the uniformed services may also take advantage of the TSP. Congress established the Thrift Savings Plan in 1986 via new federal law.
When you take part in the TSP, you have the option to contribute some of your pay toward your account. Your agency may offer a match on your contributions. That question depends on the retirement system to which you belong. What’s more, the tax treatment of your contributions will hinge on the type of TSP account that you hold.
How much income might you receive from your TSP account in retirement? That depends on a number of factors, including your lifetime earnings as a federal employee, how much money has been put into the account over time, and how much those savings have grown.
What Are Your Options for Investing in the Thrift Savings Plan?
Those in the federal civil service and the uniformed services have many investment options in the TSP that offer broad diversification. These options consist of different funds, and they allow you to grow your retirement savings in different markets, with varying levels of risk, and varying growth potential. Those fund options include:
- Five individual funds
- Ten lifecycle funds
The five individual funds let you invest in short-term U.S. Treasury securities, fixed-income, U.S. stocks, and/or international stock markets. The lifecycle funds are simply a mix of investments in the five individual funds based on different asset allocations.
The Thrift Savings Plan is actually the largest defined-contribution plan in the world, as it has so many people participating in it. Its maintenance cost is generally lower than the costs of 401(k) plans and other similar plans found in private-sector employment.
Traditional and Roth Thrift Savings Plan Options
Depending on what you think about what taxes might be in the future, you have two options with the TSP for retirement saving:
- A ‘traditional’ TSP account, in which your contributions are made on a pre-tax basis.
- A Roth TSP account, in which contributions are made on an after-tax basis.
With a traditional TSP account, you defer paying taxes on your money in the account until you start taking withdrawals later on. Generally, those withdrawals are when you have separated from service and have retired. In exchange for paying taxes later, your contributions and investment gains grow “tax-deferred.”
In a Roth TSP account, your contributions are taxed upfront. In other words, you will pay taxes on the money that you contribute to your Roth TSP account. In exchange, your account withdrawals in retirement will be generally tax-free. Of course, various requirements have to be met for that benefit. Your federal benefits counselor can go over the basics of this.
How Does the Thrift Savings Plan Work for FERS Employees?
If you are part of the FERS system, the Thrift Savings Plan is included in your retirement benefits. Your other benefits under FERS are a pension annuity and Social Security benefits.
As you fall under FERS, your agency will make a contribution equal to 1% of your base pay to your TSP account each pay period. It’s good to know that this agency contribution goes only for traditional TSP accounts.
You aren’t required to make employee contributions so that you can receive this 1% agency contribution. That being said, if you do choose this, matching contributions may be made by the U.S. Government on the first 5% of your base pay which you contribute each pay period. If you elect to stop regular contributions, your matching contributions will stop as well.
What Does the Thrift Savings Plan Look Like for CSRS and Military Employees?
What if you are part of CSRS? Then your retirement benefits are different from FERS-covered employees. In that case, the Thrift Savings Plan is a supplemental benefit to your CSRS annuity. Payments from your CSRS annuity will also generally be greater than what FERS employees receive from their own pension annuity.
Members of the uniformed services may also take advantage of the TSP. The Thrift Savings Plan is a supplemental benefit to their military retired pay.
Under CSRS, you have options to allocate some of your pay to the TSP or to a voluntary contribution account. You won’t get a government match on your contributions. Nevertheless, if you are building up savings in a traditional TSP account, those funds will grow tax-deferred.
How Much Can You Contribute to the Thrift Savings Plan?
The Internal Revenue Service permits you to contribute money from your pay up to certain limits. The IRS typically changes these limits annually. Should you be age 50 or beyond, you may also make “catch-up” contributions to further grow your retirement money.
If you are over age 50, the IRS permits “catch-up” contributions. These stepped-up contribution limits are intended to help mid-career and late-career government employees build up their retirement savings with tax advantage.
Your Federal Retirement Benefits and Your Financial Future
Now that we have covered the basics of the Thrift Savings Plan, let’s go back to you. Have you thought about how your TSP account and your other federal employee benefits will help you reach your retirement goals?
How much retirement income will you be able to count on from your TSP account? How does your TSP account fit into your overall financial picture with your other federal benefits? Will you have enough income in retirement to cover your lifestyle? Will you have income that is equal to your salary or have even more income than that? What further steps could you take to reach your goals?
As you consider these questions about your benefits and other what-ifs, you may wonder about how you can answer them for yourself. A knowledgeable benefits counselor from Federal Employee Benefits USA can assist you by walking you through your benefits, and going through a personalized benefits analysis and retirement gap report.
Contact us or request your federal benefits analysis report to see how your Thrift Savings Plan account and other benefits can help you personally accomplish your hard-earned goals.