By: Dan Miller, CFP®
What is a TSP?
“The Thrift Savings Plan (TSP) is the government version of a 401(k). It is available to U.S. military members and federal employees.”3 It is a retirement savings program similar to 401(k) plans offered in the private sector.
Because a TSP is a defined contribution plan, each participant has their own retirement savings account. The value of the account is determined by the amount invested by the employee, any matching contributions by their employer, fees, and the market value of the underlying investments. Contributions can be made on either a before-tax (Traditional) basis or after-tax (ROTH).
Traditional vs Roth TSP Plan Options
When you start employment that qualifies you for a TSP, you can choose tax treatment for your contributions.
- Traditional (pre-tax) contributions and investment earnings are tax-deferred
- Roth (after-tax) contributions with tax-free earnings during retirement1
Each plan has benefits, so it depends on your individual situation. Make sure to do your research or talking to an advisor before making a decision.
If the retirement plan invests money directly from your paycheck, before taxes are taken out, this is considered a tax-deferred (Traditional) contribution. The money in the account grows tax-deferred until funds are withdrawn. All withdrawals will be considered to be" taxable distributions" and the amount(s) withdrawn will be included in your taxable income for that tax year.
ROTH contributions are made after-taxes on earnings have been calculated. There is no current year tax-deductions for the amounts withheld like there are with Traditional TSP contributions. The difference is that once withheld they now have the ability to grow tax-free for the account holder. Upon withdrawal, neither the after-tax original contribution amount nor earnings will be included in taxable income as long as all conditions are met. Please consult with your own tax professional for guidance.
Once you make your first contribution to a TSP, your account is established. Depending on if you are classified as FERS, CSRS, BRS, etc., and when you started federal service, you may be automatically enrolled in a TSP.
If you began or rejoined federal service after October 1, 2020, and are FERS, CSRS, or BRS; you are automatically enrolled in the TSP with 5% of your salary contributed. You also get contributions from your agency if you are FERS or BRS.
If you began or rejoined federal service between August 1, 2010, and September 30, 2020, and are FERS, CSRS, or BRS member; you were automatically enrolled at 3%.1
If you were hired before August 1, 2010 and are FERS or BRS “opt-in” member and are not making your own contributions; you are still accruing Agency/Service Automatic 1% contributions.
If none of these situations describe you or you’d like to make a change to your contribution election, make sure to talk to your benefits office or contact your agency.
TSP Contribution Limits
Contribution limits for a TSP are the same as a private-sector 401(k). For 2021, the maximum you can contribute is $19,500. However, if you are 50 or older, you can put in an additional $6,500 “catch-up” contribution.
Where is the money in your TSP allocated?
TSP has 5 main fund options you can choose to invest in, which are all based on index funds. Index funds are a simple, low-cost way to buy stocks.
- Short-term U.S. Treasuries – G Fund
- U.S. Corporate Bonds – F Fund
- Large U.S. Companies (S&P 500) – C Fund
- Small U.S. Companies (Willshire 4500 Index) – S Fund
- International Fund – I Fund
- BONUS: Lifecycle Fund – L Fund
- A mix of all the 5 funds allocated for a specific “target” retirement date
For more information on these funds, go HERE.
If eligible, the TSP is a great tool to use to save for retirement. It offers a good variety of investment options and a diversified portfolio, all which at a very low-cost. Plus, your employer may also match your contributions up to a certain point. If you have any questions about your TSP or what to do with it after you retire, please reach out to us!
Dan Miller, Kaleb Robuck, and Marcus Taylor are investment adviser representatives of, and securities and advisory services are offered through, USA Financial Securities Corp. (Member FINRA/SIPC). USA Financial Securities is a registered investment adviser located at 6020 E Fulton St., Ada, MI 49301. Miller Financial Group is not affiliated with USA Financial Securities. Miller Financial Group, Inc. is not affiliated with the Thrift Savings Plan or the Federal Government. MFG does not provide tax advice. Please consult with your own tax-professional regarding how the TSP may potentially impact your own personal tax situation.