The Thrift Savings Plan (TSP) is a retirement option for federal employees and military members. It is described by the government’s TSP official site as offering “the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans.” It is administered by a government agency known as The Federal Retirement Thrift Investment Board, which is supported by private sector companies that provide call center support and other services.
TSP relies on member and employer contributions-the amount of money you have access to via TSP in your retirement years depends on how much you and your employer pay into the program. TSP is often discussed as a part of a larger financial plan for retirement-it can be quite helpful to think about TSP in this way. From the TSP official site:
“If you are covered by the Federal Employees’ Retirement System (FERS), the TSP is one part of a three-part retirement package that also includes your FERS basic annuity and Social Security. If you are covered by the Civil Service Retirement System (CSRS) or are a member of the uniformed services, the TSP is a supplement to your CSRS annuity or military retired pay.”
Who Is Eligible For TSP?
“Most employees” of the federal government are eligible to participate. This includes (but may not be limited to) the following categories in general:
- A Federal Employees’ Retirement System employee hired on or after January 1, 1984.
- A Civil Service Retirement System employee hired before January 1, 1984 who did not convert to FERS.
- A member of the uniformed services including members of the Ready Reserve.
- A civilian “in certain other categories of Government service” according to TSP.gov.
Additionally, you must be actively employed full or part-time in government service to be eligible to contribute.
Signing up for TSP involves filling out Form TSP-1 (available from the TSP official site) and Election Form TSP-U-1. Applying online is also possible via your agency or military branch’s electronic forms via EBIS, LiteBlue, myPay, or Employee Express.
TSP Sign Up
When signing up for the Thrift Savings Plan, you will need to learn about the investment plan options for your funds, complete contribution allocation paperwork and set up an “interfund transfer”, and name a beneficiary for your funds should you die or become incapacitated. You can learn about how these procedures work at the TSP official website.
Thrift Savings Plans Benefits
- Low Fees – Expenses on the accounts are very low about 1/10th the average of a private mutual fund. For instance, the TSP C fund which tracks the S & P 500 consistently has one of the very lowest expense ratios as compared to other funds. This means more more money goes to the servicemembers bottom line.
- Automatic Payroll Deductions.
- Pre-Tax Contributions – TSP contributions are made before taxes are calculated.
- Loan Programs – General purpose and first time home buyer loans are allowed. Repayment terms are typically 1 to 5 years.
- Matching Contributions – Each branch of service may contribute matching contributions based on certain stipulations.
- After Service Withdrawal – While servicemembers can no longer contribute they can leave their money in the TSP and continue to earn returns on it.
Common TSP Retirement Terms
Agency/Service Automatic (1%) Contributions: Contributions equal to 1% of your basic pay made each pay period to your TSP account by your agency or service if you are a FERS or BRS participant. CSRS employees and non-BRS members of the uniformed services do not receive automatic contributions.
Agency/Service Matching Contributions: Contributions on the first 5% of pay you contribute every pay period if you’re a FERS or eligible BRS participant.1 The first 3% is matched dollar for dollar by your agency or service; the next 2% is matched at 50 cents on the dollar. This means that when you contribute 5% of your basic pay, your agency or service contributes an amount equal to 4% of your basic pay to your TSP account. Together with the Agency/Service Automatic (1%) Contribution you get, your agency/service puts in a total of 5%. Don’t miss out on this free money: be sure to contribute at least 5% to get the full match.
Annuity: A specified amount paid at regular, defined intervals for a set time period, often the remainder of your life. You can purchase either of two life annuity types through our annuity provider: 1) a single life annuity that provides a monthly benefit or amount only to you for as long as you live, or 2) a joint life annuity with your spouse or with someone other than your spouse. This is an irreversible choice and your TSP money leaves your account permanently. You should know that purchasing an annuity is not your only option for receiving monthly income. You can keep your money with the TSP and choose to get regular monthly payments either in fixed amounts or based on your life expectancy.
Compounding: A principle of investing that makes it possible for your retirement savings to increase exponentially. It allows you to make money not just on what you contribute to your TSP account each pay period, but also on the money that it earns. Compounding is most effective the more years it has to work, so it’s best to start saving as soon as you can and to save consistently.
Contribution Allocation: A choice you make that tells the TSP how future money going into your account should be invested among the TSP funds. You may be eligible for different contribution types and amounts based on your employment status, retirement plan, and age. It’s important to understand your options to maximize your TSP savings so you’ll have enough money at retirement.
Diversification: A strategy for reducing the risk of investing in a single industry/market sector by spreading the risk over various industries/market sectors. Investments that increase in value can help compensate for others that are not changing or decreasing and vice versa. In other words, diversification can help reduce risk and smooth out returns.
Interfund Transfer (IFT): An IFT allows you to redistribute all or part your money already in your account among the different TSP funds. Each month, your first two IFTs can redistribute money among any or all of the TSP funds. After that, for the remainder of the month, you can only move money into the Government Securities Investment (G) Fund. An IFT does not change the way new contributions, transfers or rollovers into the TSP, or loan payments are invested.
Investment Allocation:How to invest your savings in TSP funds. You can choose TSP funds for new money coming into your account with a “contribution allocation,” and you can change how you invest money currently in your account with an “interfund transfer.”
Required minimum distribution (RMD)—You can keep your savings in the TSP as long as you want, even after you separate from service. However, once you’ve separated from service, the Internal Revenue Code requires that you receive a certain portion of your TSP account beginning in the calendar year when you become age 72 (or age 70½ if you reach 70½ before December 31, 2021).
Roth TSP Contributions: Contributions from your pay that have been taxed before they go into your TSP account. Because you pay the taxes on your contributions up front, you don’t pay taxes on that money or any earnings when you make withdrawals as long as you meet certain IRS requirements.
Target Date Funds: An asset mix that automatically changes to become more conservative as you get closer to your retirement “target date.” You determine your target date, sometimes called “time horizon,” based on when you expect to need your money.
Traditional Contributions: Contributions from pay that have not yet been taxed. These contributions are also referred to as “tax-deferred,” “pretax,” or “non-Roth” contributions. When you withdraw money from your retirement account later, you are taxed on the amount you take out. If you are a uniformed services member making tax-exempt contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.
Transfer or Rollover: This is how you move money from your other eligible retirement plans to your TSP account. Transferring eligible Roth or traditional savings to your TSP account allows you to take full advantage of the TSP’s low-cost funds, and we’ll help make the process simple.
Vesting: The time in service that you must have upon separation from federal employment to be entitled to keep any Agency/Service Automatic (1%) Contributions and associated earnings. Most FERS participants are vested in (entitled to keep) these automatic contributions after completing 3 years of service. BRS members and FERS employees in congressional and certain noncareer positions become vested after 2 years of service.
Withdrawal: This is how you receive money from your TSP account. You have flexible withdrawal options with the TSP, including single withdrawals, installment payments, and annuity purchases. You can use one of these methods or any combination of them that you choose. It’s important to plan ahead because withdrawals permanently reduce your account balance and may have different effects on your taxes.
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