How Does a Thrift Savings Plan (TSP) Work?

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), which is a plan offered by companies in the private sector.

Key Takeaways

  • 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 (increasing to $20,500 in 2022). If they are 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.
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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 (increasing to $20,500 in 2022) in a TSP, unless you're 50 and over, in which case the limit is $26,000 (increasing to $27,000 in 2022).

After two years, most employees are eligible for a full match of up to 5% of their salary. That's free money.

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.

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.

Although 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.

Individual Funds

  • 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&P 500
  • The S fund, which is a small-cap stock index fund—riskier than the C fund, with higher potential gains
  • The I fund, an international stock index fund that mirrors the MSCI EAFE Index—the riskiest individual fund, with the highest potential assets

Lifecycle Funds

A sixth choice is to invest in the Lifecycle Fund, containing a percentage of all five individual funds. As the Lifecycle Fund approaches maturity, the funds in the portfolio are rebalanced towards less risky assets.

What Is the Contribution Limit for the Thrift Savings Plan?

The annual contribution limit for the Thrift Savings Plan is $19,500 in 2021 and $20,500 in 2022. If you are 50 and older, you can contribute an additional $6,500 in both years.

What Is the Difference Between a Thrift Savings Plan and a 401(k)?

The Thrift Savings Plan is a qualified retirement plan for federal employees and members of the uniformed service. A 401(k) plan is a qualified retirement plan for the private sector. Both plans have the same contribution limits and are structured similarly but there are some differences.

What Happens to My Thrift Savings Plan if I Quit My Job?

If you quit your job, your Thrift Savings Plan will remain as is if the balance is $200 or more, and it will continue earning. You can control the account and make adjustments to your investments but you cannot make any more contributions.

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, but 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.

Article Sources
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  1. Thrift Savings Plan. "About Us."

  2. Internal Revenue Service. "IRS Announces 401(k) Limit Increases to $20,500."

  3. Thrift Savings Plan. "Lifecycle (L) Funds."

  4. Thrift Savings Plan. "Frequently Asked Questions."

  5. Thrift Savings Plan. "Individual Funds."

  6. Internal Revenue Service. "401(k) Plans."