What is a Thrift Savings Plan?

Many private sector employers offer 401(k) retirement plans to their employees. But if you work in the public sector, you may wonder what equivalent options you have to financially prepare for your future. For federal government employees or for those who serve in the armed forces (either active duty or reserves), one answer is a Thrift Savings Plan (TSP).

A TSP is a tax-advantaged retirement investment plan to help build long-term savings. You contribute money to the account via payroll deductions, and you can choose from a selection of investment options.

As with other retirement savings vehicles, a TSP can help you put away money that you'll access after you retire to use as income to cover your living expenses and support the lifestyle you've envisioned. You can borrow from your TSP if life events come up. And when you're retired, you may have another option for withdrawing funds.

Other key TSP benefits include:

• Potential market growth. Retirement plans typically gain much more in value over time than interest-based savings products, helped in part by investment compounding. You'll have options for investing your TSP contributions that you can match with your risk tolerance.
• Tax advantages. Like other retirement accounts, your TSP can be either traditional or Roth, giving you the option of either tax-deferred growth or tax-free withdrawals. You can also split your contributions between traditional and Roth TSPs, though any agency matching goes to your traditional account.
• Agency matching. As long as you're eligible, your employing agency will automatically match 1% of your pay even if you don't contribute. If you do contribute, agencies match the first 3% of your contributions at 100% and the next 2% is matched at 50% on the dollar.
• Low fees. Compared to other investment options, TSPs typically have modest administrative and investment fees, helping you keep more money in your pocket.
  

As long as you qualify for a TSP through your job, your agency employer can help you get started with a plan. You'll first choose whether you want a traditional TSP that uses pre-tax dollars (you're taxed later in retirement) or a Roth TSP that uses after-tax dollars (you're taxed now).

If you're going to contribute, you can set up automatic payroll deductions. Then you'll select an investment option that fits your goals, timeline and overall risk tolerance. After that, you're set up and ready to go—though you'll want to plan on checking back regularly to adjust your contributions and investment choices based on any changes in your financial situation.

Here are some other details to know about how TSPs work:

The annual contribution limits are set by the IRS. In 2024, the maximum contribution is $23,000 if you're under 50. If you're over 50, you can add $7,500 in catch-up contributions.

TSPs have six individual fund options for plan participants. They range from low-risk government securities to higher-risk investments that try to match the benchmarks of various stock indexes. They include:

• Government Securities Investment Fund (G Fund)
• Fixed Income Index Investment Fund (F Fund)
• Common Stock Index Investment Fund (C Fund)
• Small Cap Stock Index Investment Fund (S Fund)
• International Stock Index Investment Fund (I Fund)
• Lifecycle Funds (L Funds)

Like other retirement plans, TSPs have required minimum distributions (RMDs) if you have the traditional variety. This means that after you reach a certain age—73 as of January 2023—you have to withdraw a minimum amount every year as calculated by the IRS. RMDs are a way for the government to ensure you eventually take money out of your tax-deferred retirement account and pay the taxes due.

Roth TSPs do not have RMDs since the passage of the SECURE Act 2.0 eliminated them for all Roth accounts, mainly because the money contributed to Roth accounts has already had taxes paid on it.

If you become a federal employee, you can transfer or roll over funds from other retirement plans such as 401(k)s and IRAs. And if you join the private sector after being a federal employee, you can roll over or transfer your TSP to a new employer's plan or to an IRA that you open on your own.

While they have some similarities, TSPs have key differences from 401(k)s, 403(b)s and IRAs.

• 401(k) plans are for private sector employees.
• 401(k)s typically offer more investment options and may have higher fees than TSPs.
• While employers may match 401(k)s, they don't have standardized matching like TSPs.

• 403(b) plans are set up like 401(k)s but are for non-profit and public sector employees.
• 403(b)s may offer a broader range of investments than TSPs and vary in fee structures.
• Matching contributions in 403(b) plans are less common than in TSPs.

• IRAs are available to most people who have earned an income that year.
• IRA contribution limits are much lower than those for TSPs at $7,000 in 2024, with an additional $1,000 catch-up contribution for those over 50.
• Traditional and Roth IRAs aren't employer-related, so there aren't matching contributions. SIMPLE and SEP IRAs are employer-related.

If you're eligible, a TSP can be a strategic addition to your retirement plan. However, saving is just one part of an overall retirement strategy. After spending a lifetime working hard, you want to know you have the savings you need to enjoy retirement, spend time with your family and give back.

That's where working with a financial advisor can help. They can look at your overall financial situation and develop a saving, spending and tax strategy to help you make the most of retirement.