Thrift Savings Plan: What it Is and How it Works
If you work for Uncle Sam, your retirement savings options differ from your civilian counterparts. The Thrift Savings Plan (TSP) is the equivalent of an employer-sponsored retirement plan if your employer is the U.S. government. This article will take a closer look at the Thrift Savings Plan, I’ll explain what it is and how it works.
Thrift Savings Plan Eligibility
Only federal employees and members of the military are eligible for the TSP. For those covered by the Federal Employees Retirement System (FERS), the Thrift Savings Plan is one-tier of a three-part retirement package. Additionally, the others consist of Social Security and FERS basic annuity. For members of the military or those covered by the Civil Service Retirement System (CSRS), the TSP supplements military retirement pay or the CSRS annuity.
How the Thrift Savings Plan Works
Similar to a 401(k) or IRA in the private sector, the Thrift Savings Plan is a tax-deferred retirement savings and investment plan. For FERS employees, 5% of the basic salary is deducted and placed in the Thrift Savings Plan account. And for CSRS employees, your agency establishes your account after you make a contribution election via the agency’s electronic payroll system.
For 2022, government employees may contribute up to $20,500. In addition, those aged 50 and up may contribute an additional $6,500.
Traditional vs. Roth Plan
Employees can decide between a traditional or a Roth Thrift Savings Plan. The decision all comes down to tax treatments. For instance, opt for the traditional, and contributions go to the Thrift Savings Plan prior to tax withholding. At retirement, money withdrawn from the plan is taxed at your current income tax rate.
With the Roth plan, contributions enter the TSP after tax withholding. That means paying taxes at your current income tax rate. However, you won’t pay taxes when you make withdrawals in retirement.
Change the contribution at any time through your agency or service payroll system.
Thrift Savings Plan investment options and their objectives include:
- G Fund: Government securities investment fund. The objective is capital preservation and generating returns above short-term U.S. Treasury securities.
- C Fund: Common stock index investment fund, matching the return of the S&P 500
- I Fund: International stock index fund. Matches the performance of the MSCI EAFE (Europe, Australasia, Far East) Index.
- S Fund: Small cap stock index investment fund. Matches the performance of the Dow Jones U.S. Completion Total Stock Market Index.
- F: Fixed income index fund, matching the performance of the Bloomberg Barclays U.S. Aggregate Bond Index.
The Thrift Savings Plan also offers Lifecycle Funds, similar to target-date funds. For example, these 10 “L” funds are a diversified mix of the plan’s five core funds. Currently, these 10 funds range from “income,” for retirees, to those planning to retire in the year 2065.
It is possible to take out a loan from your Thrift Savings Plan account. The loan amount cannot exceed the amount of your own contributions and earnings. Additionally, you cannot borrow from the earnings or contributions from your federal agency or service branch.
Loans are repaid with interest. In addition, two types of loans are permitted. A general purpose loan is used for anything you’d like and repayment terms range from one to five years. A residential loan, used for the purchase or construction of a primary residence only, has a repayment term of one to 15 years. This loan does require documentation. Along with conventional housing, a recreational vehicle or boat may be a primary residence. However, TSP residential loans can’t be of use to pay off a mortgage, construct an addition to an existing residence or renovate it, or purchase raw land.
A repayments is set up as a payroll deduction. For that reason, only active federal employees and military members are eligible for loans.
Thrift Savings Plan Rollovers
When federal employees or members of the military separate from employment and take a new job in the private sector, they have the option of rolling over their Thrift Savings Plans into an employer-sponsored retirement plan or an IRA. Upon such separation, they have four options:
- Keep some or all of their funds in the TSP.
- Transfer assets to the new employer’s plan, after checking with the employer’s HR department.
- Rollover assets into an IRA.
- Cash out the balance.
However, keep in mind that if under 59.5, cashing out the balance is an early distribution by the IRS. That subjects you to a 10 percent early withdrawal penalty. Applicable federal, state, and local taxes also apply.
After retirement, there are three basic methods of withdrawing money from the Thrift Savings Plan. For instance, these consist of:
- Installment payments, either monthly, quarterly, or annually. Payments are a fixed dollar amount based on your life expectancy.
- Single withdrawals
- Annuity purchases
Thrift Savings Plan Considerations
After separating from federal employment or the military and properly completing all withdrawal forms, it may take up to eight weeks to process a withdrawal. However, if a Thrift Savings Plan loan remains unpaid, that may delay disbursement.
About Jane Meggitt
Jane Meggitt specializes in writing about personal finance. Besides investing and planning for retirement, she writes about insurance, real estate, credit cards, estate planning and more. Her work has appeared in dozens of publications, including Financial Advisor, Zack’s, SF Gate and Investor Junkie. A graduate of New York University, Jane lives on a small farm in New Jersey horse country.