What is the Thrift Savings Plan?
The Thrift Savings Plan (TSP) is a retirement savings and investment plan reserved specifically for federal employees and members of the uniformed services. It was established by Congress to offer the same types of savings and tax benefits that many private employers offer through 401(k) plans. The TSP is administered by the Federal Retirement Thrift Investment Board, which we’ll refer to as the TSP Board in this blog series.
The TSP is a defined contribution plan. This means the retirement income you receive from your account depends on how much you and your agency put into the account during the years you worked, and the earnings accumulated over time.
As a federal employee enrolled in a TSP, you are part of the largest defined contribution plan in the world. At the end of 2020, there was over $644 billion dollars inside the TSP, made up of employee contributions, agency contributions, and some nice stock market runs.
SOURCE: www.frtib.gov
SOURCE: https://www.frtib.gov/MeetingMinutes/2021/2021Feb.pdf
SOURCE: https://www.frtib.gov/pdf/minutes/2021/Feb/MM-2021Feb-Att1.pdf
There are about 6 million participants in the TSP, and that number continues to grow. In 2018, the military implemented the Blended Retirement System, making it so that anyone who enlisted after January 1, 2018 was automatically allowed to participate in the TSP with a 5% contribution match. So whenever someone enlists in the uniformed services, the TSP gets another participant.
SOURCE: https://www.tsp.gov/bulletins/17-u-3/
A Timeline of the TSP
The TSP was created in 1986, and the first contributions were made to the G Fund in 1987. The F and C Funds were added in 1988, and it wasn’t until 2001 that the TSP Board added the S fund and I Fund. In August of 2005, Lifecycle Funds came into existence, making it so that you no longer have to figure out your own investment allocations. Instead, there are predetermined models available based on when you plan to retire.
Source: https://www.fedweek.com/tsp/tsps-evolution-performance-past-30-years/
In addition to saving in traditional pre-tax dollar accounts, you could also set aside funds after taxes in a tax-free growth account.
2019 saw a major change to TSP withdrawal rules. Prior to this, after you retired, you were allowed to take two withdrawals from your TSP in your entire lifetime. That was it. But those rules have been loosened, and you now have much more flexibility in withdrawing from your TSP.
SOURCE: https://www.tsp.gov/bulletins/19-6/
And in July of 2020, five more Lifecycle Funds were added. Check out TSP 201 for more information about Lifecycle Funds.
SOURCE: https://www.tsp.gov/plan-news/more-lifecycle-funds-now-available/
Advantages of Participating in the TSP
First and foremost is the fact that if you contribute at least 5% to your account, you get a matching 5% back. In other words, if you make that initial contribution, you receive a full match.
Source: https://www.tsp.gov/making-contributions/contribution-types/
All defined contribution plans give you some perks, but TSPs are unique in their list of items they offer:
- You get automatic payroll deductions, which is a way to save money
- You have a diversified choice of investment options through five funds, and you can pre-allocate them in the Lifecyle Funds
- Their fees are low when compared to other retirement savings accounts
- You get a choice of how you want to make your contributions:
- Traditional (pre-tax) contributions and tax-deferred growth, only paying taxes and applicable penalties at the time of withdrawal.
- Roth (after-tax) contributions, where the principal has already been taxed so it grows tax-free if you satisfy IRS requirements. Earnings grow tax-deferred and you only pay taxes and applicable penalties at the time of withdrawal.
Another perk of the TSP is that it’s pretty easy to manage once set up. That’s because there are only six things you control inside it while you’re still working:
- How much you contribute, up to a limit set by the IRS
- Whether you contribute to the Traditional TSP, the Roth TSP, or a combination of both
- How you allocate your TSP among those five funds, or those ten Lifecycle Funds
- Whether you quality for, and how much you can borrow from you TSP on a loan
- Whether you take withdrawals after you turn 59 ½ and are still working
- Who your beneficiaries are
And if you’re under 59 ½ and still working, that means you only have to worry about five items instead of six.
The Difference Between Traditional and Roth TSPs
The main difference between a Traditional TSP and a Roth TSP account is the way you pay taxes on each of them. With a Traditional TSP, all contributions are made before taxes have been withheld, then you pay taxes on the withdrawals you make from it. With a Roth TSP, all contributions are made after taxes have been withheld.
Because all contributions to a Traditional TSP account are made pre-tax, all amounts withdrawn must then be taxed. When you withdraw from the account, the entire amount you withdraw is considered “ordinary income,” and whatever tax bracket you’re in when you withdraw it is indicative of what you’re going to pay on it. Since all contributions were made pre-tax, both the principal and any earnings must be taxed.
Allocating Contributions to Your TSP
You can contribute to a Traditional TSP, a Roth TSP, or both. You can also contribute the maximum to a Roth TSP as well as the maximum to an individual Roth IRA. Of the $19,500 total you can make in regular contributions, if you’re above age 50, you get to decide how you want to divide them up. You can send it all to a Traditional TSP, all to a Roth TSP, or do a combination of both. If you make all your contributions to the Roth TSP, your government agency will still give you that 5% match. However, if you put everything into a Roth TSP, that matching money goes into a Traditional TSP—because the government isn’t about to give you free money that’s also tax-free.
If you are age 50 or more, you are also allowed to make catch-up contributions to your TSP, bringing your total allowable contributions to $26,000. These were established by Congress when they realized that people early in their career may not have been contributing as much as they wished they had, and so are now given that option. The only criteria are that you have to contribute the full $19,500 regular contribution amount already, and you must be at least 50 years old.
Source: https://www.tsp.gov/bulletins/20-8/
Withdrawing from Your TSP
You may begin taking distributions from your TSP accounts after age 59 ½, as well as while still working and contributing to your account (though you may pay fees and penalties if withdrawing before age 59 ½). You can take a partial withdrawal or even a full withdrawal to move elsewhere and keep contributing money to the account afterward if you so choose. There is no limit on the number of withdrawals you can make after you are age 59 ½, though you are limited to only withdrawing once every 30 days.
There are two rules to keep in mind for withdrawing specifically from your Roth TSP if you aim to have your withdraw be tax-free:
- You must leave the money in there for five years before you can withdraw your tax-free growth.
- You must be 59 ½ years old.
You are never required to take a minimum distribution from your Roth IRA because you don’t owe any taxes on it. But when it comes to your Roth TSP, the IRS will require that you start taking minimum distributions from it when you reach 72 years old. That’s because they’ve never gotten a dime from any taxes paid on those accounts. You still don’t owe taxes on the distributions, but you must begin to deplete the account at 72. This is because when you pass away, the balance in your account is passed to your heirs tax-free, and they can legally let it sit and grow tax-free for up to ten more years before they have to withdraw on it.
Source: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimumdistributions
Source: https://www.tsp.gov/publications/tsp-775.pdf
There are so many good choices to make when it comes to the TSP. Understanding the role your TSP can play in the grand scheme of your retirement and beyond is the first step to utilizing it.
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