The Federal Employees' Retirement Security Act of 1986 established the Thrift Savings Plan, or TSP. It is a qualified retirement plan for federal employees and members of the uniformed services. The Thrift Savings Plan is a defined contribution plan similar to a 401(k) plan offered by companies in the private sector.
- Thrift Savings Plans are retirement plans for federal employees and members of the uniformed services.
- They are similar to 401(k) plans, in that contributions are pre-tax and may receive matching contributions.
- Government employees can contribute up to $19,500 to a TSP in 2021. If they 50 or older, they can contribute an additional $6,500.
- Savers have the option of choosing among five core funds, or a target-date fund that combines percentages of the five core funds.
- As with other retirement plans, the most important thing is to start early.
Understanding a TSP
The Thrift Savings Plan was introduced in 1986 through the Federal Employees Retirement System Act. A TSP allows federal workers to invest in a tax-advantaged retirement account. Much like an IRA, there are traditional TSPs, in which money is taxed when you withdraw it, and Roth TSPs, where you pay taxes on contributions but the earnings are tax-free.
Unlike IRAs, the contribution limits are quite a bit higher. In 2021, you can deposit up to $19,500 in a TSP, unless you're over 50, in which case the limit is $26,000.
If you are part of the Federal Employee Retirement System (FERS) or the Blended Retirement System (BRS), your agency may match your contributions. Most agencies automatically contribute 1% of your salary to a TSP, and an additional 4% after two years of service.
Double Your Money
After two years, most employees are eligible for a full match of up to 5% of their salary. That's free money!
Investing in a TSP
The Thrift Savings Plan accepts rollovers from previous retirement plans such as an old 401(k) or IRA. Likewise, if a participant terminates employment and goes to work in the private sector, the Thrift Savings Plan account can either remain intact or be rolled over into the new employer's plan or to a traditional IRA.
Though the Thrift Savings Plan is limited in its available investment options, it does offer a low-cost way for government workers to save efficiently for retirement. As with other qualified retirement plans, the participant is able to choose and allocate any percentage of their assets into any desired funds.
The available funds are below.
- The G fund, which invests in government securities, such as Treasuries.
- The F fund, which invests in corporate and government bonds.
- The C fund, an index fund representing the S&P500.
- The S fund, which is a small-cap stock index fund. This is riskier than the C fund, with higher potential gains.
- The I fund, an international stock index fund that mirrors the MSCI EAFE Index. This is the riskiest individual fund, with the highest potential assets.
A sixth choice is to invest in a Lifecycle Fund, containing a percentage of all five individual funds. As a lifecycle fund approaches maturity, the funds in the portfolio are rebalanced towards less risky assets.
The Bottom Line
A Thrift Savings Plan is a major compensation for employees of the federal government and armed services. Not only does it provide a tax-advantaged form of retirement savings, the government will also match employees' contributions in order to help them save for retirement. As with other retirement plans, the most important thing is to start early.