Federal Retirement Thrift Investment Savings Plan: Maximizing Your Retirement Benefits

The Thrift Savings Plan (TSP) is a defined contribution retirement savings and investment plan for federal employees and uniformed service members. It was established by Congress in the Federal Employees' Retirement System Act of 1986 and is administered by the Federal Retirement Thrift Investment Board, an independent agency. The TSP offers federal employees similar tax benefits and savings to those of private corporations' 401(k) plans. As of 2021, the TSP has approximately 7 million participants and more than $845.4 billion in assets under management.

The Thrift Savings Plan (TSP)

The TSP is one of three components of the Federal Employees Retirement System (FERS), the others being the FERS annuity and Social Security. It is also open to employees covered under the older Civil Service Retirement System (CSRS) but with fewer benefits, such as the lack of matching contributions.

The TSP is administered by the Federal Retirement Thrift Investment Board, an independent agency. As of December 31, 2021, the TSP had approximately 7 million participants and more than $845.4 billion in assets under management, making it the largest defined contribution plan in the world.

The TSP offers a choice of six funds and a mutual fund option:

• The Government Securities Investment (G) Fund
• The Fixed-Income Index Investment (F) Fund
• The Common-Stock Index Investment (C) Fund
• The Small-Capitalization Stock Index Investment (S) Fund
• The International-Stock Index Investment (I) Fund
• Specific Lifecycle (L) funds

The F, S, C, and I funds in the TSP are index funds currently managed by the BlackRock Institutional Trust Company. These funds are designed to mimic the return characteristics of the corresponding benchmark index. For example, the C Fund is invested in a fund that replicates the S&P 500 Index, which is made up of the stocks of 500 large- to medium-sized U.S. companies.

L funds are invested in the five individual TSP funds, and their asset allocations are based on the individual investor’s time horizon. The TSP also offers a "mutual fund window," which allows participants to invest part of their balances in private-sector mutual funds.

The TSP has a variety of investment options, and participants can choose from any or all of the individual or Lifecycle funds. Employees may also choose to invest in a Roth TSP for tax-free withdrawals in retirement.

The TSP offers many benefits to federal employees, including the ability to save for retirement, receive matching agency contributions, and reduce current taxes. Employees can contribute to the TSP through automatic payroll deductions, and the contribution limits are set by the Internal Revenue Code.

Overall, the TSP is a valuable retirement planning option for federal employees and service members, providing them with similar benefits to those offered in the private sector.

TSP vs 401(k)

A Thrift Savings Plan (TSP) is a defined-contribution retirement plan for federal employees and uniformed service members. It offers similar tax benefits to 401(k) plans that many private employers offer, but the investment options and fees differ.

Similarities between TSP and 401(k) plans

TSP and 401(k) plans are similar in many ways. Both offer tax advantages, including the potential opportunity to withdraw funds at lower tax rates in retirement. They also have the same contribution limits and early withdrawal penalties. Both plans also impose required minimum distributions (RMDs) for participants in retirement.

Differences between TSP and 401(k) plans

The main difference between TSP and 401(k) plans is that TSPs are only available to federal government employees, while 401(k) plans are only available to employees of private-sector companies. TSPs offer fewer fund options than 401(k) plans, but TSP fees are much lower. TSP employer matches are vested immediately, and the automatic employer contributions are vested in two to three years. In contrast, some private-sector 401(k) plans vest employees with 100% ownership of employer contributions immediately, while others may take up to six years.

TSP and 401(k) plans in brief

TSPs and 401(k) plans are two vehicles used to save and invest for retirement. TSPs are available to federal government employees, while 401(k) plans are offered by private-sector companies. TSPs offer lower fees and more immediate vesting of employer contributions, while 401(k) plans provide a wider range of investment choices.

TSP vs IRA

The Thrift Savings Plan (TSP) is a defined contribution retirement savings and investment plan for US federal government employees and members of the military. It is designed to closely resemble the dynamics of private sector 401(k) plans.

A Roth Individual Retirement Account (IRA) is a retirement savings account that can be opened by anyone with earned income, and is available at banks, brokerages, or other financial institutions.

Contributions

Contributions to a TSP can only be made from a federal salary through payroll deductions. In contrast, IRA contributions can come from any source of earned income.

For 2024, the contribution limit for a TSP is $23,000, with an additional $7,500 allowed if you are aged 50 or older. The contribution limit for an IRA is $7,000, with an additional $1,000 allowed if you are aged 50 or older.

There are no income limits for contributing to a Roth TSP, but there are for a Roth IRA: $161,000 for single filers and $240,000 for joint filers in 2024.

Withdrawals

You can take the principal from your Roth IRA at any time without penalty, but you cannot make early withdrawals from a TSP without incurring a penalty.

With a TSP, if you separate from federal service in the year you turn 55 or later, you will have penalty-free access to the money in your account. With an IRA, you will be subject to a 10% early withdrawal penalty for anything you take out before reaching the age of 59 1/2.

Required Minimum Distributions (RMDs)

You must take RMDs from an IRA at age 73 (or 75 if born in 1961 or later), regardless of whether you are still working. There are no RMDs from a TSP if you are still working at your federal job.

Matching contributions

All Federal Employees Retirement System (FERS) employees automatically receive a contribution of 1% of their basic pay from their agency, even if they do not participate in the TSP. Additional matching contributions are made dollar-per-dollar up to 3% of basic pay, then at $0.50/$1 for each additional dollar up to 5% of basic pay.

Vesting

FERS employees must generally complete three years of federal civilian service to be fully vested in agency automatic contributions. Military and civilian service cannot be combined to meet vesting requirements.

Tax benefits

Both Roth TSPs and Roth IRAs are after-tax retirement accounts. Contributions and earnings grow tax-free, and qualified withdrawals are also tax-free.

Flexibility

An IRA offers more flexibility than a TSP, as it does not require you to leave your job to roll money out or make withdrawals.

TSP investment options

The Thrift Savings Plan (TSP) offers a choice of six funds and a mutual fund option. The six funds are:

• The Government Securities Investment (G) Fund: a short-term, risk-free investment.
• The Fixed-Income Index Investment (F) Fund: invested in a bond index fund that tracks the Lehman Brothers US Aggregate (LBA) bond index.
• The Common-Stock Index Investment (C) Fund: invested in a stock index fund that tracks the Standard & Poor's (S&P) 500 stock index, made up of large- to medium-sized US companies.
• The Small-Capitalization Stock Index Investment (S) Fund: invested in a stock index fund that tracks the Wilshire 4500 stock index, made up of small- to medium-sized companies.
• The International-Stock Index Investment (I) Fund: an international fund that invests in stocks from overseas companies in 21 countries.
• Specific Lifecycle (L) funds: these funds are invested in the five individual TSP funds, and their asset allocations are based on the individual investor’s time horizon. For example, the L 2040 Fund is for participants expected to retire anywhere between 2038 and 2042.

The mutual fund window is for TSP participants who want more flexibility in their retirement investments. You can invest a portion of your TSP savings through the TSP mutual fund window into available mutual funds of your choice. However, there are certain requirements for participating in the mutual fund window, such as having at least $40,000 in your TSP account and not investing more than 25% of your account balance in mutual funds.

TSP withdrawal options

The Thrift Savings Plan (TSP) offers several withdrawal options for federal employees and uniformed service members. Here is a detailed overview of the TSP withdrawal options:

Withdrawal Options:

• Lump-sum withdrawal: You can choose to withdraw all your money from the TSP as a taxable lump sum. This option exposes your entire TSP balance to federal income taxes, and possibly state income taxes, in a single tax year.
• Monthly payments: Another option is to withdraw your money in equal monthly payments. These payments can be based on a fixed dollar amount or actuarial tables. However, this option may be too simplistic and may not offer the most favourable income options.
• Life annuity: The TSP can purchase a life annuity for you. This option provides a guaranteed income stream for life but offers less flexibility in terms of investment choices.
• Rollover to IRA: You can perform a rollover of your TSP funds to a Traditional IRA and/or Roth IRA with the help of a financial advisor. This option provides broader investment choices and potentially better income planning, asset allocation, and tax planning opportunities.
• Partial withdrawal: If you have a balance of at least $1,000, you may request a partial withdrawal from your TSP account.
• Periodic payments: You can choose to receive periodic payments (monthly, quarterly, or annually) based on a dollar amount or request the TSP to compute lifetime payments. These payments can be changed once every 30 days, and you also have the option to request a final single payment of the remaining balance at any time.
• Age-based withdrawal: Employees over the age of 59 1/2 can request an "age-based" withdrawal without specifying any reason. There is a limit of four such withdrawals per calendar year, and there is no longer a 30-day waiting period between withdrawals as of 2024.
• Financial hardship withdrawal: In cases of financial hardship, you can make a withdrawal once every six months. This type of withdrawal is limited to specific needs, such as negative monthly cash flow, medical expenses, personal casualty losses, legal expenses, or losses due to a major disaster.

It is important to note that the TSP withdrawal options have improved over the years, but they may still be more restrictive compared to the withdrawal options offered by other retirement plans, such as IRAs. Additionally, the TSP has a large number of participants, which can result in longer paperwork processing times for withdrawals. Therefore, it is advisable to understand all your options and seek professional financial advice to make the most informed decisions regarding your retirement savings.

Frequently asked questions