Most employees are familiar with defined contribution plans, such as 401(k) plans, IRAs and pension plans. But relatively few are familiar with the thrift savings plan (TSP), unless they are federal employees. In this article we'll provide you with high-level information about the TSP, including eligibility for participation, a comparison to private sector retirement plans and some of the other key features.

Who Is Eligible for a TSP?
Federal civilian employees are eligible to participate in TSPs, as are members of the uniformed services. However, to be eligible to receive matching contributions, those in the uniformed services must agree to serve in active duty for at least six years, and serve in a specialty designated by the secretary responsible for their service to receive matching contributions. The matching contribution would be made during the six-year active duty obligation. (For related reading, see 3 Reasons To Use An Employer-Sponsored Plan.)

Lower Your Taxes by Contributing to a TSP
There are two primary tax benefits of contributing to the TSP. The first benefit is that contributions that are made from your paycheck are made "before tax", which reduces your taxable income by the amount of your contribution. The employer (federal government) matching contributions are also not taxed when your employer initially puts the money in your account. The second benefit is the deferral of tax liability on the earnings, allowing for compound interest on earnings. The tax bite is deferred until you begin to withdraw funds from the plan, according the TSP plan's distribution rules. (For more insight on the benefits of compound interest, see Compound Your Way To Retirement.)

FERS Employees & Matching Employer Contributions
Among civilian TSP participants, only Federal Employee Retirement System (FERS) employees are entitled to receive agency or employer contributions. If you are an FERS employee, your agency makes two different types of contributions to your TSP account as part of your FERS benefits. These contributions are neither deducted from your pay, nor do they increase your pay for income tax or Social Security purposes. The two types are:

  1. An automatic, nonelective contribution of 1% of compensation that is made to an employee's account when he or she becomes eligible
  2. A matching contribution that is made only to the accounts of employees who make salary deferral contributions

The federal agency will make automatic and matching contributions for civilians who are FERS employees based on the employees' own contributions. Employees under the civil service retirement system (CSRS) may participate in the TSP, but are not eligible for matching contributions. The typical FERS matching formula is:

  • $1 for every $1 the employee puts in, up to 3% of the employee's pay
  • 50 cents for what the employee puts in above 3%, up to 5% of pay

In other words, the employee may receive matching contributions on up to 5% of pay. Contributions above 5% of pay are not matched.

Limits on Employee/Employer Contributions
An employee can contribute any dollar amount or percentage (1-100%) of basic pay, provided the amount does not exceed the Internal Revenue Code limit, which is $17,500 for 2013, or $23,000 for employees who are at least age 50 by the end 2013. The combined employee and employer contribution cannot exceed the annual addition limit, which is $51,000 for 2013, plus an additional $5,500 for employees who are at least age 50 by the end of the year. Contributions made from income that is tax exempt under the Combat Zone Tax Exclusion are not subject to this $17,500 limit, but are counted as part of the annual addition limit.

Vesting - Entitled to Employer Contributions
Vesting means that you have met the service requirements that entitle you to keep the automatic 1% contributions and earnings when you leave federal service. For this 1% contribution, FERS employees usually become vested after completing three years of service; this is reduced to two years for FERS employees in congressional and certain noncareer positions. FERS and CSRS participants are always vested in their own contributions and the earnings. FERS participants are always vested in the matching contributions their agencies make, as well as the earnings.

Rollover Contributions From Another Retirement Plan
The TSP can accept funds that are distributed from a Traditional IRA, defined-contribution, or defined-benefit plan, provided the funds are rollover eligible. If you are considering a rollover from a qualified plan to your thrift plan, you should check with the administrator of the plan from which you wish to roll over the money or your tax advisor to ensure that the funds are rollover eligible.

Investment Options
You can allocate any whole percentage of your future contributions, including loan repayments and rollovers from Traditional IRAs or eligible employer plans, to any of the TSP investment funds by making a contribution allocation. You can reallocate your existing account balance among the funds by making an inter-fund transfer.

Investment Risk Transferred to Employee
The TSP is a defined-contribution plan with features similar to a 401(k) plan. As with other defined contribution plans, the employee bears the investment risk for his account and the account balance is determined by contributions and the performance of the investments. Employee are responsible for deciding how to allocate their contributions among the available investments, and the performance of these investments will make a big difference in the amount of funds that are available at retirement. As such, if you participate in a TSP, you want to make sure your investment selections are suitable for your financial profile and rebalance your portfolio when necessary. (For more insight, read A Guide To Portfolio Construction.)

Before you make any investment decision, you should carefully read the fund information sheets for each investment option. They describe the investment funds and their advantages, risks and performance histories. Your account is invested for your retirement, and you should make your investment decisions with this long-term goal in mind.

How Can I Monitor Investment Performance?
You can obtain the daily share prices for each of the investment fund from the thrift saving plan website. You can also obtain the rates of return for each fund for the most recent month and the most recent 12-month period, as well as historical rates of return for the funds and their related indexes. Returns for each fund are updated monthly. This information can be used to monitor your investments' performance and help you to make educated investment decisions. (For more on this process, read Is Your Portfolio Beating Its Benchmark?)

Conclusion
Your TSP is a key component of your retirement savings. Remember that the purpose of this plan is to supplement other retirement income such as Social Security or a pension and to help ensure that you have sufficient funds to live comfortably during your retirement years. It may sure seem like a long way off, but your retirement date may creep up on you. It's important to plan carefully and thoughtfully for this important and rewarding part of your life. Consider working with a competent financial planner to help ensure that you make the choices that are suitable for your financial profile.

Related Articles
  1. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  2. Retirement

    Early Out: A Realistic Plan to Retire Younger

    If you want to retire ahead of schedule, it'll take some extra planning.
  3. Mutual Funds & ETFs

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  4. Retirement

    6 Robo-Advisors That Require Little to Start

    There are many well-regarded robo-advisor options that come with minimum investment amounts. Here are snapshots of a handful of them.
  5. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
  6. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  7. Retirement

    Retirees: How to Survive When Interest Rates Drop

    Low interest rates are a portfolio killer if you're living off of investment income. Some strategies for dealing.
  8. Mutual Funds & ETFs

    4 Mutual Funds You Wish You Could Include In Your 401(k)

    Discover four mutual funds everybody wishes were in their 401(k)s. Learn which five-star-rated no-load funds leave their competition in the dust.
  9. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  10. Retirement

    5 Reasons Millennials Lead in Saving for Retirement

    Say what you want to about millennials but the one thing they are doing better than any other generation is saving for retirement. Here's why.
RELATED FAQS
  1. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    The Federal Employees' Retirement Security Act of 1986 established the Thrift Savings Plan, or TSP. It is a qualified retirement ... Read Full Answer >>
  2. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  3. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  4. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  5. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
  6. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
Trading Center