Everyone has to plan for retirement, but most retirement conversations revolve around 401(k) plans. While ideal for retirement savings, you can only have a 401(k) plan as an employee of a private company. This does not include government or military employees. However, thanks to the Federal Employees’ Retirement System (FERS), federal and military employees can build savings for retirement with a Thrift Savings Plan, or TSP.
Thrift Savings Plans Defined
TSPs are a type of retirement savings and investment account for federal employees and members of the uniformed services. TSPs include several perks like low administrative costs (think less than $20 a year for a $100,000 portfolio) and customization. For one, you can choose whether you want to contribute pre-tax (traditional TSP) or post-tax (Roth TSP) dollars. Plus, you have a diverse range of investments to mix and match if you want to manage your account yourself. Most agencies also contribute matching funds to help your savings grow faster. Perhaps best of all, you can easily move assets between TSPs and other retirement accounts.
The Federal Retirement Thrift Investment Board (FRTIB), an independent government agency, administers Thrift Savings Plans. This board establishes policies for the investments and manages the Thrift Savings Fund by reviewing investment performance. Each member of the FRTIB acts as a fiduciary, managing the TSP in the best interests of participants and beneficiaries.
Thrift Savings Plans: How They Work
TSPs operate similarly to other defined contribution plans, like 401(k) plans and 403(b) plans. The federal government automatically enrolls you in a TSP if you qualify for one. If you started as a FERS employee after July 31, 2010, your TSP will start deducting 3% of your basic pay from your paycheck each pay period. You can elect to change or stop your contributions at any time.
All TSPs accrue Agency/Service Automatic Contributions of 1% on each pay date. You don’t need to make your own contributions to receive these. Plus, these contributions don’t deduct from your paycheck. Most FERS participants can vest in the entirety of these automatic contributions after completing three years of service. Other employees in certain positions may only have to wait two years.
You can also take advantage of employer matching programs, where you employer matches your own contributions up to a certain amount. To snag the highest employer match amount, you’ll need to contribute at least 5% to your TSP. The first 3% of your contributions are matched dollar-for-dollar and the next 2% are matched 50 cents on the dollar.
Maximum contribution limits match those for 401(k) and 403(b) plans. In 2018, you can defer up to $18,500 of your salary into your plan ($500 more than 2017’s limit). You can contribute $6,000 more with catch-up contributions if you’re 50 years or older. Limits change each year to keep up with inflation. This cap only includes your payroll deductions, not employer matches.
Thrift Savings Plan Investment Options
Rather than providing a selection of well-known funds for employees to choose from, TSPs offer six different funds. Each fund has its own advantages and potential drawbacks. If you choose your own funds, take into account your risk tolerance, investment knowledge and future goals.
- G Fund (Government Securities Investment Fund) invests in government securities. These offer extremely low risk, but also have the lowest rate of return.
- F Fund (Fixed Income Index Investment Fund) invests in U.S. government, mortgage-backed, corporate and foreign government bonds. This fund takes an indexing approach to investing. This means it’s passively managed regardless of conditions in the bond market or economy. The F Fund offers fairly low risk and rate of return.
- C Fund (Common Stock Index Investment Fund) invests in the stock market from the S&P 500 Index. Return depends on market performance, meaning higher risk but you could earn more money.
- S Fund (Small Cap Stock Index Investment Fund) also invests in the stock market, but only with small to mid-size companies excluded from the S&P 500. Risk is even higher than the C fund, but your investment could earn even more.
- I Fund (International Stock Index Investment Fund) invests in international stock markets. This poses the most risk, but has the potential to earn significant growth.
Finally, Lifecycle (L) funds are those managed by professionals. They invest your savings in a diverse mix of securities from the above funds based on target retirement dates. There are several options: L2020, L2030, L2040 and L2050. The number in the title indicates the year of an employee’s retirement the plan is designed for. For example, an L2020 plan is designed for an employee retiring in 2020.
L Funds automatically rebalance investments every quarter to align risk with the target date. As a retiree already withdrawing from your TSP, you also have access to the L Income Fund. This fund focuses on preserving assets and rebalancing funds daily to maintain the right mix.
Thrift Savings Plans: Who They are For
Not everyone can open and benefit from a TSP. You will have access to a TSP as a part-time or full-time federal employee or member of the military. This includes:
- Federal Employees’ Retirement System (FERS) employees hired on or after Jan. 1, 1984.
- Civil Service Retirement System (CSRS) employees hired before Jan. 1, 1984 who did not convert to FERS.
- Active duty and Ready Reserve members of the uniformed services.
- Civilians in certain categories of government service.
If you don’t know which retirement system applies to you, check with your human resources or benefits office.
How to Withdraw From a TSP
You must begin taking distributions from your TSP account after you turn 70 and a half or the year after you leave federal employment, whichever comes later. You can choose whether you want to make a partial or a full withdrawal. Partial withdrawals allow you to make a one-time withdrawal and leave the rest in your TSP for a later date. You can make a partial withdrawal if you have not made a prior partial withdrawal or have one currently pending and did not make an age-based in-service withdrawal while you still employed by the Federal Government or the uniformed services. A partial withdrawal must amount to less than $1,000.
You can make a full withdrawal all at once, over a period of time or through an annuity that makes monthly payments. Monthly payments can be a designated dollar amount (over $25) until your TSP account runs out. You can also request your payments to reflect IRS life expectancy tables. This calculates your payments each year according to your age and account balance when you begin distributions.
If you have to make a withdrawal before age 55, you may be subject to a penalty up to 10%. If you leave federal or military employment, you can keep your TSP account so long as the balance is greater than $200. The savings will continue to grow tax-advantaged and with low administrative costs, but you won’t be able to contribute any additional money. You can, however, transfer money into TSP accounts from traditional IRAs and certain employer-sponsored plans. You can also transfer any funds out of a TSP account into other qualified retirement plans if you prefer.
If you have access to a Thrift Savings Plan, know that it provides a great retirement savings option. They work similarly to 401(k) plans, but hold more potential for higher returns and employer matches. It helps to speak with your benefits office or the like to determine your best options. You may also want to consult with a financial advisor if you want to really maximize your TSP earnings.
Tips on Saving for Retirement
- Saving for your retirement is one of the most important parts of staying financially healthy. While it helps to have a savings fund for emergencies, the later years when you won’t be working also need to be taken care of. This is why it’s important to maximize your 401(k) or TSP when you can. Contribute as much as you safely can and take advantage of employer matching programs.
- It can certainly be overwhelming to want to maximize your savings but not know quite how. Again, a financial advisor can help you there. Not only can an advisor help you boost your retirement savings, but they can help you get the rest of your finances into shape as well. It helps to find a financial advisor who specializes in your area of need, too, like retirement investing.
- Finding the right financial advisor for your specific needs can be challenging. SmartAsset offers a free financial advisor matching service that pairs you with advisors in your area. First you answer a short series of questions about your finances and then you’ll be paired with up to three advisors. All the advisors on our platform have been fully vetted and don’t have any relevant disclosures. Once you’re matched, you can read the advisors’ profiles and interview them to decide who to work with in the future.
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