Key takeaways
- The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees
- It is a defined contribution plan, allowing employees to contribute up to $22,500 annually, with catch-up contributions capped at $7,500 for those aged 50 or older
- There are seven ways to invest in a TSP
- TSPs have savings and tax benefits, including tax-deferred and agency automatic contributions, and lower fees
- Risks include market volatility and inflation, which can affect the value of investments
- Rollover rules allow new federal employees to roll their 401(k) and IRA savings into a TSP account, and those leaving the public sector to transfer funds back to a 401(k) or IRA
If you're a federal employee, chances are you're familiar with the Thrift Savings Plan (TSP), but it can be challenging and confusing.
The TSP is one of the many retirement savings options available to civilian employees of the US government. Although contributions may come straight out of your paycheck, understanding exactly how it works can help you make smart decisions when planning for your future.
In this post, we'll provide an in-depth explanation of what a Thrift Savings Plan entails—from enrollment and investment strategy to withdrawal and rollover options—to equip you with both knowledge and confidence as you prepare for retirement.
What is a Thrift Savings Plan (TSP)?
A Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees. Congress established it in the Federal Employees Retirement System Act of 1986, and the US Office of Personnel Management (OPM) administers the program.
How does a Thrift Savings Plan work?
The TSP is a defined contribution plan, meaning that the amount you save and invest depends on how much money you choose to contribute.
Thrift Savings Plan contribution limits for 2023
The regular contribution limit in 2023 is capped at $22,500 (before taxes). Contributions may also be tax-deductible.
Thrift Savings Plan Catch-up contribution limits for 2023
TSP Catch-up contributions allow participants aged 50 or older (or turning 50 in 2023) to contribute an additional $7,500 to their accounts. This amount is on top of the annual limit for regular TSP contributions.
Contribution deductions will continue until the participant takes one of the following actions:
How to invest in a Thrift Savings Plan
There are a variety of ways to invest in a TSP, including:
- Agency automatic contributions: the federal government contributes 1% of an employee's pay to a Thrift Savings Plan. This happens once the employee establishes a TSP. The agency the employee works for contributes automatically, whether or not the plan participant contributes to their TSP.
- Agency matching contributions: the employee’s agency or service matches the amount of money an employee puts into their TSP, up to 5% of their salary.
- Traditional TSP tax-deferred contributions: withdrawals are taxable once you retire.
- Roth TSP after-tax investments: withdrawals are not taxable once you retire.
There are six available funds to invest in a Thrift Savings Plan + one mutual fund
- G Fund (government securities)
- F Fund (fixed-income bonds)
- C Fund (common stocks)
- S Fund (small-cap stocks)
- I Fund (international stocks)
- L Funds (lifecycle funds)
- Mutual Fund Window
The Federal Retirement Thrift Investment Board (FRTIB) contracts the BlackRock Institutional Trust Company to manage the TSP's index funds: the F, S, C, and I funds. This federal entity acts as a fiduciary, ensuring the best interests of participating federal employees and their beneficiaries.
The L funds are a mix of the five individual funds (including the G fund), providing diversification to plan participants.
The mutual fund window is provided to TSP participants seeking additional investment options. If you are eligible and willing to pay the associated fees, you can invest some of your TSP savings in any of the available mutual funds.
What are the advantages of a Thrift Savings Plan?
The main advantages of a TSP are its savings and tax benefits. Your contributions to the plan are tax-deferred, meaning you don't have to pay taxes on the money until you withdraw it, typically in retirement.
You also receive matching contributions from your agency (up to 5% of your salary) and can take loans against the value of your TSP account.
Additionally, since the TSP is government-run, fees are usually lower than those of other investment options.
What are the risks of Thrift Savings Plans?
Like any investment, there are risks associated with investing in the TSP. The most significant risk is market volatility.
Since some of your contributions to the TSP are invested in securities (market-based vehicles), your account balance can fluctuate significantly depending on the performance of the underlying investments.
Additionally, there is the risk of inflation, which can erode the purchasing power of your retirement savings.
To manage these risks, diversify your investments and always consult a financial professional.
Thrift Savings Plan rollover rules
Federal employees who are new to the job can roll their 401(k) and IRA savings into a TSP account.
Conversely, if they leave the public sector and move to the private sector, they can transfer their funds back to a 401(k) or IRA.
How are TSPs different from IRAs, 401(k)s, and other retirement accounts?
The Thrift Savings Plan (TSP) differs from other retirement accounts in a few ways.
First, the TSP is only available to federal employees, while IRAs and 401(k)s are available to the general public.
Another difference between TSPs and other retirement accounts is the loan program availability: participants in the TSP are allowed to take out loans against their accounts with interest (the current interest rate is 3.625%). In contrast, other retirement accounts like IRAs do not offer this feature, while others, like 401(k)s, have tighter restrictions and typically levy higher interest rates.
Additionally, the TSP is managed by a government agency (the Federal Retirement Thrift Investment Board), so fees tend to be lower than those of other investment options.
Finally, there are differences in contribution limits and types of investments available. For example, the TSP offers six different funds and a mutual fund window, while IRAs and 401(k)s have a wider array of investment options.
Final word
The Thrift Savings Plan (TSP) is a great retirement savings option for federal employees. It offers tax-deferred contributions with low fees, loan program availability, and generous contribution limits.
Its six funds and mutual fund window provide a variety of investment options to suit your individual needs. With its many benefits, a TSP can be an invaluable asset to your retirement savings plan.
