Thrift Savings Plan (TSP)

A thrift savings plan (TSP) is a type of retirement investment program open just to federal employees and members of the uniformed services, including the Ready Reserve. It is a defined-contribution plan that provides federal employees a lot of the same benefits that are offered to employees in the private sector. A TSP closely resembles a 401( k) plan.

How a TSP Works

TSP benefits can include automatic payroll contributions as well as agency matching contributions.

Individuals can choose to make tax-deferred contributions into a traditional TSP, which means the money that flows into the account will not be taxed until it is withdrawn. They may also choose to invest in a Roth TSP. This option allows employees to make after-tax contributions to their plans to ensure that they’ll owe nothing in taxes when they withdraw the money after retiring.

Employees new to federal employment can roll over 401( k) and individual retirement account (IRA) assets into a TSP– and vice versa if they move to the private sector.

Investing Options

The TSP offers a selection of six funds in which to invest:

  • The Government Securities Investment (G) Fund
  • The Fixed-Income Index Investment (F) Fund
  • The Common-Stock Index Investment (C) Fund
  • The Small-Capitalization Stock Index Investment (S) Fund
  • The International-Stock Index Investment (I) Fund
  • Specific lifecycle (L) funds designed to include a mix of securities kept in each of the other five individual funds

The F, S, C, and I funds in the TSP are index funds currently handled by the BlackRock Institutional Trust Company under contract by the Federal Retirement Thrift Investment Board (FRTIB). This independent government agency administers the TSP and serves as a fiduciary that is legally liable to handle the TSP prudently and in the best interests of participants and their beneficiaries.

Index funds in the TSP are designed to mimic the return characteristics of the corresponding benchmark index. For instance, the C Fund is invested in a stock index fund replicating the S&P 500 Index, which is comprised of the stocks of 500 large- to medium-sized U.S. companies. L funds are invested in the five individual TSP funds, and their asset allocations are based on the individual investor’s time horizon.

TSPs vs. IRAs

This is not an either/or proposition since you can have both a TSP as well as an IRA at the same time. One main difference between them is their respective contribution restrictions. For 2021, the yearly limit is $19,500 for a TSP ($ 20,500 for 2022); for an IRA it is much less–$ 6,000 ($ 7,000 of you are over 50)– and that is a combined total if you have multiple IRAs. Therefore, a TSP allows you to grow your retirement funds at a faster pace than an IRA does.

Another major difference is in the employer match. The federal government offers a sliding percentage scale of matching contributions for your TSP. Even if you contribute nothing, it will contribute 1% of your annual salary to your TSP. The scale tops out at a 5% government match if you contribute 5% of your income to your TSP, thus doubling the amount of money invested. Since an IRA is something you establish for yourself, with no employer involved, there are no matching contributions.

The investment fees also differ. TSP fees are quite low, generally around 0.05%, and transparent. In the private sector, IRA investment fees can vary from 0.5% to 2.5%, depending on the type of fund, and it can sometimes be hard to know exactly how much they are in aggregate. Nevertheless, IRAs offer a greater range of investment possibilities than TSPs do, limited as they are to the six funds discussed above. This allows the IRA holder to be more aggressive in their investment strategies than the TSP holder.

Some final differences involve withdrawals. Traditional IRAs and TSPs, in addition to Roth TSPs, have required minimum distributions (RMDs) that begin at age 72. (Only Roth IRAs are not subject to RMDs.).

With an IRA, you are allowed to take whatever withdrawals you like, without a fine, beginning at age 59 1/2. TSPs only allow you to withdraw monthly, quarterly, or annually, and you can request that the payment be a specific dollar amount or an amount based on your life expectancy and account balance that is recomputed annually.

IRAs have an early withdrawal fine of 10% for any money withdrawn when you are younger than 59 1/2. However, if you retire at age 55 or older, TSPs will forgo the 10% fine. Even better, if you qualify under Federal Employees Retirement System (FERS) special provisions, this age drops to 50.

Is a TSP the Same Thing as a 401( k)?

Not exactly, though they are structured similarly and have the same contribution limits. A TSP is what the federal government offers rather than a 401( k), which is the kind of plan provided by private employers. Thus, you can not have both a TSP and a 401( k).

Is a TSP Better Than an IRA?

TSPs and IRAs both have benefits. With a TSP, you can contribute considerably more money annually, expect matching contributions from the federal government, and pay lower investment fees.

You have greater control over your investments with an IRA, and there are no limits on withdrawals from it upon retirement. You can borrow from your TSP (up to $50,000), however you can not usually borrow from an IRA account.

Unlike with an IRA, you can request a complete withdrawal of your TSP account in monthly payments, an annuity lifetime payment, or a lump sum amount if you leave your job in federal service. Furthermore, you can combine these options.

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