A Thrift Savings Plan (TSP) is a retirement investment program available exclusively to federal employees and uniformed service members, including the Ready Reserve. It’s a defined-contribution (DC) plan that offers many of the same benefits as private-sector retirement plans. Like a 401(k), TSP provides federal workers with the opportunity to save for retirement with various tax advantages and employer matching contributions.
Key Highlights
- Comparable to a 401(k): TSP functions similarly to a 401(k) plan, tailored specifically for federal employees and uniformed services personnel.
- Immediate and Long-term Tax Benefits: Participants can benefit from immediate tax breaks on traditional TSP contributions, or choose a Roth TSP for tax-free withdrawals in retirement.
- Investment Flexibility: TSP participants can invest in six different fund options and a mutual fund window, allowing for diversified investment strategies.
- Seamless Transfers: Employees can roll over funds between TSP and other retirement accounts like 401(k)s and IRAs, enabling smooth transitions between public and private sector employment.
How the Thrift Savings Plan (TSP) Operates
Employees can invest in a TSP through the following methods:
- Automatic payroll contributions
- Agency matching contributions
- Tax-deferred traditional TSP contributions (taxed upon withdrawal)
- After-tax Roth TSP contributions (tax-free upon withdrawal)
The contribution limits for 2023 are set at $22,500, with an increase to $23,000 in 2024. Employees aged 50 and above are eligible for additional catch-up contributions of $7,500.
Rolling Over Retirement Funds
New federal employees can roll over their 401(k) and IRA assets into a TSP, and vice versa if they transition back to the private sector.
TSP Investment Options: Diversify Wisely
TSP participants can choose from six main funds and a mutual fund window:
- Government Securities Investment (G) Fund
- Fixed-Income Index Investment (F) Fund
- Common-Stock Index Investment (C) Fund
- Small-Capitalization Stock Index Investment (S) Fund
- International-Stock Index Investment (I) Fund
- Lifecycle (L) funds
- Mutual Fund Window
Managed by BlackRock under the Federal Retirement Thrift Investment Board (FRTIB), these funds aim to match the performance of their respective benchmarks, such as the S&P 500 Index for the C Fund.
The Mutual Fund Window
For those seeking more investment flexibility, the mutual fund window allows participants to allocate up to 25% of their TSP savings into mutual funds, provided they maintain a minimum TSP account balance of $40,000.
TSPs vs. IRAs: Complementary Retirement Strategies
Contribution Limits
For 2023, the contribution limits are $22,500 for TSPs and $6,500 for IRAs. In 2024, these limits increase to $23,500 for TSPs and $7,000 for IRAs.
Employer Matching Contributions
TSP participants benefit from federal employer matching contributions, up to a maximum of 5%, something not available with IRAs.
Fees and Investment Opportunities
TSPs have significantly lower fees (around 0.05%) compared to IRAs, which can range from 0.5% to 2.5%. However, IRAs offer broader investment opportunities.
Withdrawal Rules and Penalties
Withdrawals from traditional TSPs and IRAs must meet Required Minimum Distributions (RMDs) starting at age 73. Early TSP withdrawals are penalized, excluding those taken after retiring at age 55 or older (or 50 for certain FERS provisions).
How to Reach TSP Administrators
For assistance, call the toll-free Thriftline at 877-968-3778 (Mon-Fri, 7 a.m. to 9 p.m. ET) or the international line at 404-233-4400. The 711 TTS Relay is available for individuals with hearing or speech disabilities.
Mailing Address and Online Support
You can send mail to Thrift Service Center, C/O Broadridge Processing, P.O. Box 1600, Newark, NJ 07101-1600. Online account holders can communicate via the Message Center, with responses generally within two business days.
Understanding the True Potential of Your TSP
While a TSP offers federal employees and servicemembers a robust framework similar to private-sector 401(k) offerings, it also brings unique advantages like lower fees and government matching contributions.
Is a TSP Better Than an IRA?
Both TSPs and IRAs have their distinct benefits. Contributions to TSPs can be significantly higher with employer matches, while IRAs offer more control over investment choices and easier access to funds in retirement.
What If You Leave Federal Service?
If you leave your federal job, your TSP remains active (with a balance of $200 or more), continuing to accrue earnings. However, you cannot make new contributions, and the government might reclaim employer contributions if you’re not fully vested.
Conclusion: Making the Most of Your TSP
The Thrift Savings Plan provides a reliable retirement saving vehicle with several unique advantages. It’s tailored for federal employees and servicemembers, offering tax benefits, employer contributions, and diverse investment options. While it may not match the full flexibility of an IRA, it remains an excellent tool for building a secure financial future.
Related Terms: 401(k) plan, IRA, retirement funds, investment funds, federal employment.
References
- Thrift Savings Plan. “TSP Basics”.
- Thrift Savings Plan. “Tax Rules About TSP Payments”, Pages 7–8.
- Thrift Savings Plan. “Tax Rules About TSP Payments”. Page 2.
- Thrift Savings Plan. “Individual Funds”.
- Thrift Savings Plan. “Making Contributions”.
- Thrift Savings Plan. “Move Money Into the TSP”.
- ThriftSavingsPlan.gov. “2024 TSP Contribution Limits”.
- Internal Revenue Service. “401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500”.
- U.S. Office of Personnel Management. “TSP Transfers and Rollovers: How, When, and Why (or Why Not!)”.
- U.S. Department of Labor. “Performance Audit of Thrift Savings Plan Investment Management Operations”, Pages 6-7 of PDF.
- Thrift Savings Plan. “L Income”.
- TSP.gov. “TSP Mutual Fund Window”.
- Internal Revenue Service (IRS). “401(k) Limit Raises to $23,000 for 2024; IRA Limit Rises to $7,000”.
- Thrift Savings Plan. “Contribution Types”.
- Thrift Savings Plan. “Administrative and Investment Expenses”.
- Congress.gov. “H.R. 2617 Consolidated Appropriations Act, 2023”, Page 831, Sec. 107 (c)(v)(I).
- Internal Revenue Service. “IRA FAQs - Distributions (Withdrawals)”.
- Thrift Savings Plan. “In-Service Withdrawal Types and Terms”.
- Thrift Savings Plan. “Withdrawals in Retirement”.
- Thrift Savings Plan. “Considering Your Next Move?”, Page 2 of PDF.
- Thrift Savings Plan. “Important Tax Information About Payments From Your TSP Account”, Page 5.
- Thrift Savings Plan. “We’re Here to Help”.
- Thrift Savings Plan. “Loan Types and Terms”.
- Thrift Savings Plan. “Contribution Types”.
