A Thrift Savings Plan offers federal employees a low-cost retirement savings option. This article pulls information directly from TSP to help you understand the program.
While TSP is a good option, it limits who can open one and the types of funds you can invest in.
Continue reading to learn more.
What is a thrift savings plan?
A Thrift Savings Plan – also known as TSP – is a retirement savings plan for federal employees. This includes those in uniformed services and members of the civil service.
Similar to a 401(k) offered by a private sector employer, TSP allows public sector workers to contribute a portion of their paycheck for retirement.
Employees who are enrolled in a TSP can contribute 5% of their salary to receive an employer match.
There are two types of TSPs:
- Traditional TSP: Contributions are made before taxes, providing an immediate tax break. Earnings grow tax-free but withdrawals made in retirement are taxed as regular income.
- Roth TSP: Contributions are made after taxes. Roth contributions don’t provide any immediate tax benefits, but because taxes are paid up front, withdrawals are made tax-free in retirement.
How does a TSP work?
TSP is a low-cost way for public sector employees to save for retirement. Participants can make contributions through automatic payroll contributions and there is an employer matching contribution up to 5%.
Once you’re enrolled in TSP, there are six different funds you can invest in. TSP charges an administration fee based on the fund you invest in ranging from 0.048% to 0.079%.
According to the TSP program, these fees are lower than 99% of other investment options available for savers.
In 2024, the contribution limit is $23,000. Individuals age 50 or older can make a $7,500 catch-up contribution, bringing their limit up to $30,500.
Withdrawals are restricted while you are employed and the IRS mandates you take required minimum distributions from your TSP.
TSP Loans
TSP participants can take a loan up to $50,000 from their retirement savings. The current interest rate on tsp loans is 4.00%.
There are two types of loans borrowers can take:
- General Purpose: These loans can be used for anything and are offered in 12-60 month repayment terms.
- Residential: These loans are used for the purchase of a primary residence with 61-180 month repayment terms.
To be eligible for a loan, you must have at least $1,000 in contributions in your account and be currently employed as a federal civilian employee or a member of the uniformed service.
Loan payments are deducted directly from your paycheck. There is a $50 administrative fee for general purpose loans and a $100 fee for residential loans.
Borrowers can take out up to two loans but only one primary residence loan.
A TSP account cannot be used as collateral for a loan. Any loans taken out of the account are funded by your own retirement savings.
TSP Contribution Limits
Like most retirement savings plans, TSPs come with contribution limits that you will want to be aware of.
2024 TSP Contribution Limits
Age | Contribution Limit |
---|---|
Under 50 years old | $23,000 |
50 years or older | $30,500 |
Annual limit for all contributions, including employer | $69,000 |
TSP Investment Options
TSPs allow public sector employees to invest in different funds. Each fund comes with different levels of risk:
- G Fund: The Government Securities Investment Fund is a low-risk fund designed to preserve capital by investing in short-term U.S. Treasury securities.
- F Fund: The Fixed-Income Index Investment Fund is a moderate-risk fund that focuses on bonds and tracks the Bloomberg Barclays US Aggregate Bond Index.
- C Fund: The Common-Stock Index Investment Fund is a medium-risk fund that mirrors the S&P 500 Index, giving investors exposure to large- and medium-sized U.S. companies.
- S Fund: The Small-Capitalization Stock Index Investment Fund is a medium- to high-risk fund that tracks the Dow Jones US Completion Total Stock Market Index. It gives investors the chance to earn higher returns by investing in small- to mid-sized U.S. companies but those returns come with increased volatility.
- I Fund: The International-Stock Index Investment Fund is a high-risk fund that tracks the MSCI EAFE Index. It allows investors to invest in non-U.S. companies.
- L Funds: The Lifecycle Fund is a target-date fund that adjusts asset allocation based on age and proximity to retirement.
- Mutual Fund Window: Allows investors to invest in additional mutual funds for a more personalized approach.
Pros & Cons
With any retirement savings plan, there are advantages and disadvantages you’ll want to consider before investing.
Pros
- Automatic enrollment and match: all employees are enrolled in a TSP with a match on contributions up to 5%.
- Low fees: TSP fees are lower than many private sector retirement savings plans.
- Variety of fund options: Participants can choose from a variety of options that accommodate different investment strategies.
- Ability to take out loans: Participants can borrow against their savings.
Cons
- Limited eligibility: Participation in a TSP is limited to public sector employees.
- Withdrawal restrictions: Employees can only take withdrawals under select conditions.
What are the new TSP withdrawal rules?
TSP participants can begin making withdrawals at age 59 ½. If you take a withdrawal before then you will be subject to a 10% penalty unless you qualify for financial hardship.
Spouses have the right to consent to TSP withdrawals. If you are in a TSP-eligible role and decide to make a withdrawal before retirement, you will need to obtain the consent of your spouse, regardless if you’re separated.
Distributions taken after retirement are taxed as ordinary income. You can take a total or partial distribution, or request for distributions to be made in installments.
TSPs are also subject to required minimum distributions beginning at age 72 or 73 depending on your year of birth.
Required distributions can be calculated using the IRS Uniform Lifetime Table and are subject to taxes.
TSP vs. 401(k)
Both TSPs and 401(k)s are savings plans designed to help workers save for retirement. TSPs have lower fees, but limit who can invest in them and the types of funds available for investment.
Criteria | TSP | 401(k) |
---|---|---|
Contribution Limit | $23,000 ($30,500 age 50 and older) | $23,000 ($30,500 age 50 and older) |
Employer Match | Up to 5% | Varies by employer |
Fees | 0.048% to 0.079% | Varies |
Investment Options | 6 funds with the option to add mutual funds | Varies by employer |
TSP vs. IRAs
Workers can contribute to a TSP and an IRA simultaneously. IRAs are available to anyone earning an income and provide a wider variety of options that can help workers increase their retirement savings.
Criteria | TSP | IRA |
---|---|---|
Contribution Limit | $23,000 ($30,500 age 50 and older) | $7,000 ($8,000 age 50 and older) |
Employer Match | Up to 5% | No match |
Fees | 0.048% to 0.079% | Varies |
Investment Options | 6 funds with the option to add mutual funds | Wide variety of stocks, bonds, mutual funds, and ETFs |
How to Enroll in a Thrift Savings Plan
Before enrolling in a TSP ensure that you meet the eligibility requirements. Contact your agency’s HR department to verify your eligibility and to complete any enrollment forms.
Your agency will automatically enroll in you a TSP once you begin employment in a TSP-eligible position. You will also be automatically enrolled with a 5% contribution.
Once you’re enrolled, work with your HR department to change your contribution amount or make different elections.
You can choose between traditional or Roth contributions and invest in any of the available TSP funds based on your risk tolerance.
TSPs can be rolled over if you leave your employer. To rollover a TSP you’ll want to contact your previous retirement plan provider to learn what your options are.
TSP accepts rollovers or if you leave federal employment, your TSP balance can be rolled over to a new employer-sponsored 401(k) or a traditional IRA.
Work with your new plan administrator to complete the paperwork needed to execute your rollover.
Rollovers must be done within 60 days to avoid taxes and penalties.
Is a thrift savings plan a good idea?
A thrift savings plan is a low-cost retirement savings plan for federal employees. With automatic enrollment and a 5% match, it can be a good way to save for retirement.
A TSP comes with fewer options than other savings plans. Work with a financial planner and consider opening an individual retirement account to help you reach your retirement savings goals.
FAQs
How do I contact a TSP administrator?
To contact TSP administrator call the Thriftline at 877-968-3778 Monday – Friday from 7:00 a.m. to 9:00 p.m. EST, use AVA, the TSP virtual assistant, or email TSP at [email protected].
Can I take money out of my thrift savings plan?
You can take money out of your thrift savings plan as a partial or total distribution. You can also opt for automatic withdrawals or you can purchase an annuity from an outside vendor.
Why TSPs are bad?
TSPs have limited fund options to invest in which can lower your total returns over the course of your career.
What is the TSP catch up match?
TSP participants are able to contribute an additional $7,500 bringing their total annual contribution to $30,500.