What is a TSP or Thrift Savings Plan?
Are you familiar with a TSP or Thrift Savings Plan? While many have heard of a 401(k) Plan, Federal employees are offered a Thrift Savings Plan (TSP). A TSP is a tax-deferred retirement savings and investment vehicle specifically designed for Federal government workers, including military workers.
So, how does a TSP (Thrift Saving Plan) work?
A TSP is a defined contribution retirement plan, meaning you, as an eligible participant, will choose how much you would like to contribute (subject to certain limitations). These contributions can be changed over time, but you will not have a defined income benefit as the amount you will receive in retirement will be subject to the contributions you made while contributing.
How can I contribute to a TSP?
Funds are contributed to a TSP primarily through payroll deductions from the participant. Depending on your agency (or employer), you may also be eligible for contributions directly from the agency in addition to your personal contributions.
What are the contribution limits for a Thrift Savings Plan (TSP)?
Contribution limits for a TSP are similar to 401(k) contribution limits. In the tax year 2022, you are eligible to contribute up to $20,500. Those age 50 or older are allowed an additional “catch up” contribution of $6,500 for the year. For those 50 or older, this adds up to a total contribution limit of $27,000. See this post for 2022 contribution limits for all retirement plans.
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What are the tax deferment and Roth options possible with TSPs?
Thrift Savings Plans are a great vehicle and offer many similar options to 401(k)s. TSP participants will be eligible to contribute in two different ways. They may be able to make their contributions as tax-deferred, meaning they would deduct these contributions from their income in the contribution year. From there, taxes on all growth and earnings would be deferred until retirement, at which point all distributions would be taxed as ordinary income.
Alternatively, participants may be able to contribute to a Roth in their TSP, which would not provide any tax benefits on the contribution. However, all the growth and earnings from here would be 100% tax-free when taken out, as long as the distribution is a qualified distribution.
What options do participants have for withdrawal and loans?
Withdrawals are generally limited in a TSP until age 59 and 1/2, similar to most retirement vehicles. IF you are contributing to the Roth, there are some other nuances to consider. Still, age 59 and ½ is considered “retirement” age for your retirement accounts and when withdrawals are allowed without penalty.
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How are Thrift Savings Plan funds invested?
As the participant, you can choose how to invest your TSP funds. There are investment options broken out into letter groups that specify the type of investment you have.
The funds are as follows:
G Fund: G Funds have government securities. These are typically short-term US treasuries which usually are considered very low risk.
F Fund: F Fund is comprised of bonds. These may add a bit more risk than the G Funds but are also typically considered a lower-risk investment.
C Fund: C Fund has large-company stock funds. If you are looking to invest in large US companies, this is where you will find these investments. Since this fund is made up of stocks, these funds are generally considered riskier than the bonds and government securities funds.
S Fund: S Fund has small company stock funds. Small-company funds can be considered even riskier, as small companies can have large growth but also can be much more volatile. Some of these funds also have exposure to more mid-sized US companies.
I Fund: I Fund is comprised of international company stocks. If you are looking to invest or set a portion of your portfolio in international investments, this is where you would look.
L Fund: Lifecycle funds fall in the L Funds group. These funds are designed to be more aggressive as the investor is further from retirement, but as they get closer and closer, the fund will slowly move to a more conservative mix.
For those who prefer to control this themselves, they can choose individual funds instead. These funds are split up by asset class, and you can choose which funds you would like to invest in and what percentage you would like to allocate to each. If you go this route, there are no automated allocation changes as you near retirement. If you did want to adjust as you get closer, this would need to be done manually.
Ultimately, Thrift Savings Plans (TSPs) offers a lot of flexibility and provide the participant an excellent opportunity to save and control their funds. One of the challenges is that these investments are tied to the securities you choose to invest in. Unlike a pension where you have guarantees associated with your retirement funds, TSPs allow flexibility but much less in terms of guarantees.
If you are curious about additional considerations around retirement plans, check out more information on the topic below. Additionally, please do not hesitate to reach out to me to discuss your financial plan in particular.