Thrift Savings Plan (TSP)
A Thrift Savings Plan (TSP) is an investment retirement savings plan that benefits current and retired federal employees and military members. Established by Congress through the Federal Employees’ Retirement System Act (FERS) of 1986, TSP provides similar savings and tax benefits as many private companies do under their own employee 401(k) and other retirement plans.
The TSP is a defined-contribution plan. This means that any retirement income deposited into the account depends jointly on the amount that the employee invested—and his/her company—originally invested into the account while the employee was employed, in addition to accumulated earnings over the years. Like several private sector 401(k) plans, contributions are automatically deducted from the employee’s paycheck.
While employed, one’s employer or agency is one’s primary TSP contact. Accordingly, any personal information changes or corrections that may affect one’s TSP account should be reported immediately. Following employment, the TSP becomes a plan participant’s primary point of contact.
Along with Social Security and FERS basic annuity benefits, the TSP is one of three aspects of FERS members’ retirement packages. For those covered by the Civil Service Retirement System (CSRS)—or who are members of the United States military—the TSP is supplemental to retirement or CSRS annuities. However, because CSRS employees do not receive government-matched contributions into their TSP accounts, these employees can still take advantage of the TSP to augment retirement income they will receive through CSRS.
In addition to the aforementioned automatic employee contributions, additional TSP coverage benefits include agency automatic and matching contributions, catch-up contributions, and low expense ratios.
All FERS employees receive an agency automatic contribution of one percent of base pay even if the employee does not contribute to the TSP. Additional matching contributions are on a dollar-per-dollar basis up to three percent of one’s base pay, then at a fifty-cents-per-dollar basis for each additional percentage up to five.
Also, because TSP contribution is tax-deferred, employee contributions are only taxed after the funds are withdrawn, and this withdrawal can be deferred until the employee’s retirement.
Further, employees can easily transfer TSP funds into non-government individual retirement accounts (IRAs) and 401(k) plans—and vice versa—if employment status changes.
The TSP also provides several post-separation withdrawal options for plan participants, as well as opportunities for TSP survivor withdrawal options.
Finally, TSP participants are eligible to take loans out in case of financial hardship.
Types of Funds
The TSP offers six different funds in which government employees can invest. These include common stock, small cap stock, fixed-income funds, government securities, international stock, and life cycle funds.
Contribution amounts change annually. Whereas TSP plan participants may choose to contribute any percentage or specific dollar amount of their basic income, the annual amount cannot exceed Internal Revenue Code limits which are currently:
- $18,000 (pursuant to the 2017 tax code)
- $6,000 for catch-up contributions
TSP participants who are at least 59 ½ years of age may make an in-service withdrawal provided they are still actively employed by the federal government or military, based on certain rules:
- Only vested funds may only be withdrawn.
- The amount of withdrawal must be at least $1,000 or the employee’s entire vested balance.
- Only one age-based withdrawal is permitted unless the employee has two accounts—a civilian one and a uniformed service one—both of which are associated with one’s active employment.
Disadvantages of age-based withdrawals include being subject to federal and state income tax and removal of eligibility to obtain a partial withdrawal from the same account following separation from service.
The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP. The FRTIB is an independent government agency run by five appointed Board members and an executive director who are charged with ensuring the TSP is managed according to the law and in the best interests of plan participants and their beneficiaries. TSP assets are held in trust in the Thrift Savings Fund (TSF), and all financial statements are audited annually as required by law.
Another of the FRTIB’s functions is consulting with the Employee Thrift Advisory Council (ETAC). This statutorily created council contains various representatives from labor unions, the military, and employee organizations, and it seeks to provide advice to the Board regarding any TSP-related investment policies, news, and administrative changes.
Why use a TSP?
Contributing as much as possible to a TSP is a wise financial decision because the money is invested into the employee and his/her future instead of giving the government what amounts to an interest-free loan in exchange for a large tax refund.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Chesapeake Investment Planning, LLC is not affiliated with Kestra IS or Kestra AS.
Todd Wilhoit contributes articles for Investopedia.com. See this one and more here.