As a federal employee, you probably have the Thrift Savings Plan as one of your retirement benefits. The Thrift Savings Plan, also known as the TSP, is a retirement investment plan for federal employees under the FERS retirement system. CSRS employees may also opt to participate in the Thrift Savings Plan as a supplement to their CSRS basic annuity for future retirement income.
It can play a vital role in your financial security, but you may wonder about how it works, what your options are, and what you can do to accumulate as much money as possible for retirement.
In this article, we will go over what the Thrift Savings Plan is, how it works, the investment choices it offers, and how you can use it for retirement income.
Understanding the Thrift Savings Plan
If you work directly for the federal government, then you will be able to contribute to the Thrift Savings Plan, the retirement plan that is offered to all FERS employees. FERS employees who contribute to the TSP also receive an agency match on their contributions. As mentioned earlier, CSRS employees may also elect to contribute to the Thrift Savings Plan, although they won’t receive an agency match.
The Thrift Savings Plan is essentially almost the same as a 401(k) plan in its design and implementation, except that the fees that the TSP charges are much less than most 401(k) plans in the private sector. Here we will look at each of the components of the TSP and how they can work together to help you achieve a secure retirement.
Thrift Savings Plan Basics
The Thrift Savings Plan will allow you to contribute as much each year as can be contributed to a 401(k) plan. Contribution limits are adjusted for inflation each year, and there is an additional catch-up contribution that employees aged 50 and over can make as well.
The money that you contribute to the plan grows tax-deferred until you retire and start drawing it out. Your withdrawals are taxed as ordinary income at that time. You can also make a Roth contribution to your TSP if you so choose. Then you will make after-tax contributions and, on the backend, pay no income taxes on your withdrawals at retirement.
FERS employees get an automatic contribution from the government of 1% of their basic pay each year. And the first four percent of your contributions are matched by the plan for a total match of 5% of your contributions each year. So, if you make $100,000 in basic pay and you elect to contribute 5% of your basic pay to the Thrift Savings Plan, the federal government will match that with an additional 5% contribution, giving you a total of $10,000 in your plan.
One good thing to know is that all matching contributions are made pre-tax. Therefore, if you make Roth contributions to your plan, your matching contributions will still be traditional contributions, thus giving you a mix of pre-tax and after-tax money in your plan. You can do a Roth conversion on the pre-tax money in your TSP if you so choose.
Thrift Savings Plan Investment Choices
The TSP has three primary ways to help federal employees save for retirement:
- Five core individual TSP funds
- 10 TSP lifecycle funds
- As of summer 2022, the “mutual fund window” through which certain, eligible federal employees can invest in available mutual funds
With the mutual fund window, you must pay the necessary fees, and you transfer money from your TSP account to a separate investment account with the mutual fund window vendor.
The five core funds are listed as follows:
- G Fund – This fund invests your money directly in a Treasury security that is specially issued just for TSP employees. Your money is protected from market risk in this fund, but it also has the lowest growth potential out of the five core funds.
- F Fund – This fund tracks the Bloomberg Aggregate U.S. Bond Index and is invested primarily in high-quality corporate bonds. This fund is riskier than the G Fund because of changes in the interest rate environment. When interest rates rise, the value of the bonds in the index will decline, which affects the value of your investment. When interest rates fall, the prices of the bonds in the index will rise.
- C Fund – This fund tracks the Standard & Poor’s 500 Index and invests solely in common stocks. It has more market risk than the G or F funds, but also more potential for growth over time. This fund can be a good option if you want growth potential that is above the overall rate of inflation.
- S Fund – This fund tracks the Dow Jones U.S. Completion TSM Index and invests in smaller companies that have higher growth potential. This fund is more volatile than the C Fund and generally falls into the high-risk, high-return category.
- I Fund – This fund tracks the MSCI EAFE Index, and its value rises and falls in tandem with the value of the U.S. dollar relative to other foreign currencies. The I fund is also considered a high-risk, high-return fund and is designed to provide higher returns over time.
The TSP also has several lifecycle funds that you can choose from. Each lifecycle fund invests in a combination of the five core funds. Each lifecycle fund “matures” in a different year, such as 2030 or 2040.
When each fund is created, about three-quarters of the money in each fund is invested in the three stock funds. Over time, this money is gradually shifted over to the bond funds, so when the fund reaches its benchmark year, it’s invested chiefly in the G and F Funds.
The primary purpose of the lifecycle funds is to allow people to “set it and forget it.” They can put their money in the lifecycle fund that matures in the year closest to when they plan to retire. Then they won’t have to worry about having too much money in stocks by the time they stop working.
What Are Your Options for Your TSP in Retirement?
When you retire, you have a variety of options for your Thrift Savings Plan money. You can leave your plan where it is and have it stay in whatever funds you have chosen.
You can move your money into a traditional IRA, where you may have options for an investment or retirement income that aren’t available in your TSP. Or you may convert your TSP balance in a Roth IRA so you have income tax-free distributions in retirement and, again, have choices that may not be available in the TSP.
You can also choose to move the money you have in the plan into a life annuity offered within the TSP and then collect a guaranteed income stream. Of course, each of these options has its pros and cons.
You can meet with an experienced federal benefits consultant about your overall benefits picture and these choices so that you can get the most out of your plan during retirement.
What are the Advantages and Disadvantages of the Thrift Savings Plan in Retirement?
The TSP is just about one of the lowest-cost qualified retirement savings plans around. Each fund in the plan only charges a few percentage points each year. This can be a very nice benefit for when you are saving for retirement and also investing in retirement.
But outside of the G Fund, the TSP funds carry the risk of market loss, meaning that you can lose money in those funds. The G fund also has its own inherent risks. If you worry about having enough income in retirement, the TSP also doesn’t give you the most flexible choices for guaranteed lifetime income.
Talk to your benefits consultant if you would like to explore other set, guaranteed income options to complement your pension (and Social Security benefits).
Some Final Food for Thought on the TSP
The TSP can help you to achieve a secure retirement with low-cost investment choices and matching contributions. You can visit the TSP website for more information on this plan and what it can do for you.
If you need more details for your personal situation, then you can request your own customized federal benefits analysis and retirement report. This is your own snapshot of where your benefits are currently, and where they can be 10, 20, 30, or even decades from now (depending on how long your federal career is). It’s also a roadmap for how you can maximize your benefits and have a secure retirement once you are close to separating from service and looking for ways to retire comfortably.
If you are looking for this personalized guidance, feel free to reach out to us today. One of our knowledgeable federal benefits consultants will meet with you and talk about your career, goals, and situation. We look forward to being of service to you.