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Everything Federal Employees Need to Know About the Thrift Savings Plan (TSP)

Everything Federal Employees Need to Know About the Thrift Savings Plan (TSP)

| November 16, 2022

According to the 2021 Military Family Lifestyle Survey, roughly 48% of military families are feeling financially stressed. One way military families can help alleviate that stress is to maximize their benefits for long-term stability.

A common benefit for military families is the Thrift Savings Plan (TSP) available to federal employees. Similar to a 401(k), the TSP is an amazing way to store away your hard-earned money for retirement. Here’s what you need to know to make the most of your Thrift Savings Plan.

The Basics: How a Thrift Savings Plan Works

Just like a 401(k), a TSP offers participants the opportunity to divert some of their income into a defined contribution program. For federal employees, the government contributes money an employee designates into a retirement account on their behalf. 

There are both traditional TSPs and Roth TSPs available. Having a traditional TSP means that your contributions, employer match, and investment growth are all pre-tax. When you make a withdrawal down the road, the taxes will be due based upon the applicable tax rate at the time you take the money out. 

Roth TSP accounts are post-tax, so all contributions are taxed as income at the time the contributions are made. The benefit, however, is that no tax will be due at the time you withdraw on either your contributions or your growth. It should be noted that all employer matches can only be made in a traditional account. This will result in having both a Roth and a traditional account open if you choose to make contributions into a Roth.

How Do Contributions Work?

The contribution limit for the TSP is $22,500 in 2023, with a $7,500 catch-up contribution available for employees over age 50. RMDs start at age 72 for traditional versions of both account types, though the TSP allows you to sidestep this if you haven’t yet retired from your federal employment.  

Like many employers, the plan offers a match, up to 5% when an employee also contributes 5% (a full match on the first 3%, and a .5% match on the last 2%). This is in addition to the automatic 1% contribution your agency makes on your behalf each pay period. For this reason, make sure you change your automatic deduction to 5% to take full advantage of this benefit. 

You become vested after either two or three years, depending on which branch of the government you work for. 

What About My Plan Options? 

One stark contrast we see between 401(k) accounts and the TSP is the wide variety of investment options available to most 401(k) plans, versus the slim choices available to the TSP. The TSP offers significantly fewer investment options than the average 401(k) plan. While stable and typically very conservative, the lack of options may leave some employees feeling like they have a lack of control over their portfolios. 

More recently, the TSP has started offering mutual funds as a way to expand the available investment options. However, there are additional costs that may make mutual funds less attractive to the average TSP investor. For instance, you’ll need to:

  • Maintain a $40,000 minimum balance
  • Make a minimum initial investment of $10,000
  • Pay a $55 annual administrative fee
  • Pay a $95 annual maintenance fee
  • Pay a $28.75 per-trade fee
  • Pay other fees and expenses specific to the mutual funds you choose

As with every investment, there are trade-offs no matter what you choose. Sticking with the traditional TSP investment options (index funds and lifecycle funds) can offer a much lower cost alternative to the TSP mutual funds and other investments offered through 401(k)s. In fact, 401(k)s can often have high and sometimes hidden maintenance and administrative fees. With relatively low fees, a TSP participant often enjoys the opportunity to keep more of their contributions growing for their retirement.

Beyond the Basics of a TSP

While this article hits most of the highlights, a TSP plan is multi-dimensional. In order to learn the minute details to maximize your opportunities, you need a professional who specializes in helping military families to help you navigate your options. 

At Horizon Planning Group, we believe in providing value beyond a doubt. Let’s set up your TSP in a way that works best for your unique situation. To get started, schedule an introductory meeting online or reach out to me at (770) 627-4157 or to get started. 

About Nick

Nick Marrano is financial advisor at Horizon Planning Group, a full-service fiduciary financial planning firm committed to always doing what’s right for their clients. With almost 10 years of experience, Nick spends his days serving his military and first responder clients who give their lives to serve others. As a former U.S. Marine, he understands their challenges and desires to help his clients navigate their military benefits and customize a plan to their lifestyle that allows them to pursue their goals with confidence.

Nick has a bachelor’s degree in finances from Kennesaw State University. He lives in Marietta, Georgia, with his wife, daughter, and their two dogs. His favorite things to do are being outdoors with his family, traveling, and completing projects around the house, but he also won’t say no to unwinding with his friends and playing Xbox. Nick cares deeply about his community and gives back by volunteering with the Make-A-Wish Foundation and local charities that support foster-care needs. To learn more about Nick, connect with him on LinkedIn.