If you happen to be in military service or a federal government employee, then HR has likely introduced you to the Thrift Savings Plan AKA the TSP. The federal government sponsored this retirement investment plan as a way for you to save for retirement.
Let’s take a closer look at your options when it comes to the TSP.
What is the Thrift Savings Plan?
The Thrift Savings Plan is a defined contribution plan. The account type was created through the Federal Employees’ Retirement System Act of 1986. The goal was to create a tax-advantaged account for federal employees with similar benefits to a 401(k) plan.
Unlike a pension, retirement income from your TSP is dependent on the money you have contributed to your account along the way. Additionally, the money you put into this account has the opportunity to grow through investment.
The sum of your contributions plus earnings will determine what level of income you will receive from your TSP in retirement years.
Who qualifies for the TSP?
The eligibility requirements for a TSP are fairly straightforward. You must be a federal government employee or member of the military to contribute to a TSP.
TSP’s only accept contributions from government paychecks. If you leave the service of the federal government, then you are no longer eligible to contribute to the TSP.
How do you sign up for the TSP?
If you are a FERS (Federal Employees’ Retirement System) employee that was hired after 2010, then your TSP was set up automatically. You likely noticed that your paychecks have a 3% deduction which is automatically deposited into your TSP.
If you are a BRS (Blended Retirement Service) employee that was hired in 2018 or later, then you were automatically enrolled in the TSP. After serving 60 days, you’ll notice that your paychecks have 3% automatically deducted and placed into your TSP.
As you are going through the hiring process, it doesn’t hurt to touch base with HR. Make sure that your account was set up correctly and is ready to accept your contributions.
How to choose the funds
After you set up your account, you’ll need to allocate your investments to suit your risk tolerance.
Here are the funds offered by the TSP:
- The L Funds. The L funds are lifecycle funds that reflect a target retirement date. For example, selecting the L2050 fund means that you want to retire in 2050. These lifecycle funds take your age into consideration and decrease your risk tolerance over time.
- The G Fund. The G fund represents an opportunity to invest in government securities. This fund is the least risky and therefore offers the lowest possible returns.
- The C Fund. The C fund reflects the S&P 500 of the stock market. The 500 companies in the S&P 500 represent 500 large and medium-sized U.S. based companies. The C fund is higher risk because you can lose and gain money at the whim of the stock market.
- The F Fund. The F fund invests in several things including the U.S. government, as well as bonds offered by corporations and foreign governments.
- The S Fund. The S fund is similar to the C fund. However, the fund focuses on smaller companies. Instead of the largest companies that make up the S&P 500, it invests in many smaller companies that stand to profit. This is one of the more risky funds with your TSP options.
- The I Fund. Finally, the I fund invests in international markets. Although it is the riskiest fund available, it offers a high potential rate of return.
If you aren’t sure where to get started, then a lifecycle fund is not a bad place to start. Do your research on the other options before moving forward. Crafting a solid retirement investment strategy can take time. Luckily, we have many resources available.
You’ll likely want to learn more about the following:
- Asset allocation
- The importance of investing early
- Small cap vs large cap
- Risk management
Once you’ve learned more about investing, you’ll feel more comfortable moving forward.
How much can you save?
Like most tax-advantaged retirement accounts, there is a cap for contributions each year. In 2020, you’re able to contribute up to $19,500. This limit also applies to 401(k) and 403(b) plans, so you are not at a disadvantage to these account types.
The federal government may also contribute to the TSP to help you reach your retirement goals. If you are a part of FERS or BRS, you’ll receive an automatic contribution equal to 1% of your base pay. This is possible whether or not you contribute money from your paycheck.
On top of this, you’ll be eligible for a 4% match on contributions after 2 years of service. If you choose to contribute 5%, then you’ll essentially get a 100% match. Matched contributions are essentially free money!
Clearly, these matching benefits can propel your journey to retirement. However, you will likely need to stay in the service of the federal government for two to three years to earn ‘vested’ status. This status is necessary in order to hang on to these automatic contributions.
Talk to your HR office to see how vesting might affect your ability to keep these automatic contributions. Make sure to follow up on this one. After all, it is just free money sitting on the table.
TSP compared to other savings plans
The TSP is a great retirement savings account. If you are curious about how it stacks up against other retirement accounts, then keep reading.
Overall, 401(k)s are extremely similar to TSPs. Employers have the option to match your contributions in a similar way to the matching funds put up by the federal government. However, 401(k)s have no contribution match limit. TSP matching contributions are capped at 5%. The contribution limit for these accounts is also the same each year.
A major difference is that you will be forced to pay an early withdrawal fine of $1,000 before fees with a TSP. If you need to withdraw money from your 401(k) early, then you will not be subjected to the same fine.
An IRA is another type of retirement account. You can contribute to either a Traditional IRA or a Roth IRA for tax advantages. For 2020, you can only contribute $6,000 to either a traditional or Roth IRA.
You are able to contribute to both an IRA and a TSP. Take advantage of this option to supercharge your retirement savings.
You have many options to open an IRA. If you prefer a robo-advisor then M1 Finance is a great option. They have no fees and has just a $500 minimum investment.
Ally Invest is great for someone who would like a bit more control over their investment strategy – but still wants everything to be fee-free.
Finally, TD Ameritrade is a great platform to work with if you need some extra guidance along the way.
Simplified Employee Pension
If you are self-employed, then you’ve likely heard of a SEP (simplified employee pension). This is a great option to save for retirement while you are self-employed.
However, if you land a federal government job then you might consider rolling those contributions into your newly minted TSP.
If you have the opportunity to fund a TSP, then take it. Overall, it is a solid retirement account with great matching benefits. Make sure to take advantage of that full match to reach your retirement goals quickly.
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