What is Thrift Savings Plan (TSP)

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

How a TSP Works

TSP benefits can consist of 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contributions into a traditional TSP, which means the money that flows into the account will not be taxed until it is withdrawn.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 can also choose to invest in a Roth TSP. This choice allows employees to make after-tax contributions to their plans so 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 choice 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 are designed to include a mix of securities held 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 individuals 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 duplicating the S&P 500 Index, which is comprised of the stocks of 500 large- to medium-sized U.S. firms. 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 and 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 if you are over 50)– and that is a combined total if you have multiple IRAs. Thus, a TSP allows you to grow your retirement funds at a faster pace than an IRA does.

Another big difference is in the employer match. The federal government provides 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 salary to your TSP, thus doubling the amount of money invested. Because an IRA is something you set up for yourself, with no employer involved, there are no matching contributions.

The investment fees also differ. TSP fees are quite low, usually around 0.05%, and transparent. In the private sector, IRA investment fees can vary from 0.5% to 2.5%, depending on the kind of fund, and it can occasionally be difficult to know exactly how much they are in aggregate. However, IRAs provide a greater variety 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 methods than the TSP holder.

Some final differences involve withdrawals. Traditional IRAs and TSPs, in addition to Roth TSPs, have required minimum distributions (RMDs) that start at age 72. (Only Roth IRAs are exempt to RMDs.).

With an IRA, you are permitted to take whatever withdrawals you like, without a penalty, 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 yearly.

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 waive the 10% penalty. 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 restrictions. A TSP is what the federal government offers instead of a 401(k), which is the type of plan offered 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 significantly more money every year, expect matching contributions from the federal government, and also pay reduced 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 (as much as $50,000), however, you can not typically borrow from an IRA account.

Unlike with an IRA, you can ask for a total 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. Additionally, you can combine these options.

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