What Is a Thrift Savings Plan?
The Thrift Savings Plan (TSP) was established under the Federal Employees’ Retirement Security Act of 1986, serving as a designated retirement plan for federal employees and uniformed service members. It operates as a defined contribution plan, akin to the private sector’s 401(k) plan.
**Key Takeaways**
- Thrift Savings Plans cater to federal employees and uniformed service members for retirement purposes.
- Similar to 401(k) plans, TSP contributions are pre-tax and can attract matching contributions.
- Government employees can contribute up to $22,500 to a TSP in 2023, increasing to $23,000 in 2024. For those aged 50 or over, additional contributions of $7,500 are allowed in both 2023 and 2024.
- Investors have the flexibility to select from five core funds or opt for a target-date fund blending proportions of the core funds.
- Commencing saving early remains a crucial strategy, as with any retirement plan.
Understanding a Thrift Savings Plan
Introduced in 1986 through the Federal Employees Retirement System Act, the TSP facilitates tax-advantaged retirement investments for federal workers. Analogous to an IRA, TSPs come in traditional and Roth variants, differing in tax implications upon withdrawal and contribution.
Unlike IRAs, TSP contribution limits are significantly higher. In 2023, the limit is $22,500 ($23,000 in 2024), except for individuals aged 50 and above, who can contribute $30,000 in 2023 ($30,500 in 2024).
Eligibility for a full 5% salary match usually kicks in after two years, representing a valuable perk for employees.
For those covered by the Federal Employee Retirement System (FERS) or the Blended Retirement System (BRS), agencies may match contributions. Typically, agencies automatically allocate 1% of salary to a TSP, followed by an additional 4% after two years of service.
Investopedia / Jake Shi
Investing in a TSP
The TSP allows rollovers from prior retirement plans like old 401(k)s or IRAs. Additionally, departing employees transitioning to the private sector can retain their TSP account or transfer it to a new employer’s plan or a traditional IRA.
While investment options in a TSP are limited, it provides cost-effective means for government workers to save efficiently for retirement. Fund allocation can be personalized across desired investment categories, akin to other qualified retirement schemes.
The available fund choices are below.
Individual Funds
- The G fund invests in government securities such as Treasuries
- The F fund invests in corporate and government bonds
- The C fund, an index fund representing the S&P 500
- The S fund, a small-cap stock index fund—riskier than the C fund with higher potential gains
- The I fund, an international stock index fund mirroring the MSCI EAFE Index—the riskier choice with the highest potential assets
Lifecycle Fund
The Lifecycle Fund presents a sixth option, encompassing a blend of all five individual funds. As maturity nears, the portfolio’s assets are realigned towards lower-risk investments.
What Is the Contribution Limit for the Thrift Savings Plan?
The annual contribution limit for the Thrift Savings Plan is $22,500 in 2023 and $23,000 in 2024. Individuals aged 50 and above can contribute an additional $7,500 each in both 2023 and 2024.
What Is the Difference Between a Thrift Savings Plan and a 401(k)?
The Thrift Savings Plan, tailored for federal employees and uniformed service members, is distinct from a 401(k) targeted at the private sector. While both plans share similar contribution limits and structures, subtle variations set them apart.
What Happens to My Thrift Savings Plan if I Quit My Job?
Upon leaving employment, a Thrift Savings Plan remains active if the balance exceeds $200, with the account continuing to generate earnings. While adjustments can be made to investments, further contributions are not permitted.
The Bottom Line
A cornerstone benefit for federal government employees and armed forces personnel, the Thrift Savings Plan stands as a tax-efficient retirement saving opportunity. Beyond tax advantages, the government matches employee contributions to bolster retirement savings. Commencing contributions early remains a pivotal strategy, echoing the best practices for any retirement plan.