The TSP is a retirement savings program for civilians and members of the armed forces who are employed by the United States Federal Government. The TSP is very similar to a 401(k) plan in many ways. They are similar because they are both employee sponsored and they are both defined contribution plans and tax deferred retirement plans. They also share the same annual contribution limits.
Thrift Savings Plan Details
The Thrift Savings Plan has many similarities to other defined benefit plans, such as a 401k. However, there are a few notable differences.
Defined Contribution Plan
The TSP is a defined contribution plan, which means each TSP participant has their own individual account. The amount in their account is what has been invested by that individual, along with any matching contributions made by their employer. Increases or decreases in the value of the holdings, along with expenses and fees also determine the value of the account. Many civilians employed by the government are eligible to receive matching funds up to 5% of their total pay. Most military members are not eligible to receive matching funds of any kind.
Tax Deferred Retirement Plan
Tax deferred retirement plans invest money from your paycheck before any taxes have been taken out. This money is then allowed to grow in an investment plan without the drag of taxes affecting the value of the funds. Taxes are assessed on the funds when they are withdrawn as qualified distributions during retirement.
TSP Contribution Limits
The Thrift Savings Plan follows the same contribution guidelines as the 401(k). The contribution limit in 2017 is $18,000, and those who are age 50 or above can make “catch-up” contributions, up to an additional $6,000 per year. The total amount a member can contribute in any give year is up to $54,000 under the Max Annual Addition Limit (this allows for agency matching contributions and contributions above the $18,000 limit that are made in tax-exempt zones).
Here is a full explanation of the Thrift Savings Plan contribution limits, including the agency match for civilian employees, the military matching contributions which will be included in the Blended Retirement System, the impact of making contributions while deployed to a tax-exempt zone, and more.
The following chart shows the TSP agency matching contributions. Note that you can receive up to a 5% match if you also put in the same amount.
Traditional and Roth TSP Plan Options
The TSP now offers participants the opportunity to contribute to a Traditional TSP or a Roth TSP. The difference is how the funds are taxed. Traditional contributions are tax deductible, and give the participant a break today. The funds grow tax-deferred until they are withdrawn at retirement age, at which time they are taxed.
A Roth plan works the opposite way. Contributions are made after the money has been taxed, contributions grow tax free, and are withdrawn tax free at retirement age. There are benefits to both plans, so be sure to research which is best for your situation.
After signing up for the Thrift Savings Plan, investments are automatically withdrawn from the employee’s monthly pay check and invested in the fund of their choice. The default fund if the G Fund. More explanations about the individual funds are below.
Thrift Savings Plan Investment Options
The Thrift Savings Plan has 5 main fund options one can invest in. They are all based on index funds. Index funds are an easy and low-cost way to buy stocks that track a market sector. There is also a 6th fund, the “L Fund,” or Lifecycle Fund, which is a fund comprised of the 5 main funds and allocated for a target retirement date.
Here is a listing of the funds available through the TSP (definitions taken from the fund prospectus, for more information, go to the TSP home page and click on Fund Sheets.):
- G Fund: The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government. Thus, there is no credit risk. The G Fund offers the opportunity to earn rates of interest similar to those of long-term Government securities but without any risk of loss of principal and very little volatility of earnings.
- F Fund: The objective of the F Fund is to match the performance of the Lehman Brothers U.S. Aggregate (LBA) Index, a broad index representing the U.S. bond market. The F Fund offers the opportunity to earn rates of return that exceed those of money market funds over the long term (particularly during periods of declining interest rates), with relatively low risk.
- C Fund: The objective of the C Fund is to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies. The C Fund offers the opportunity to earn a potentially high investment return over the long term from a broadly diversified portfolio of stocks of large and medium-sized U.S. companies.
- S Fund: The objective of the S Fund is to match the performance of the Dow Jones Wilshire 4500 Completion (DJW 4500) Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index. The S Fund offers the opportunity to earn a potentially high investment return over the long term by investing in the stocks of small and medium-sized U.S. companies.
- I Fund: The objective of the I Fund is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. The I Fund offers the opportunity to earn a potentially high investment return over the long term by investing in the stocks of companies in developed countries outside the United States.
- L Fund: The Lifecycle Funds diversify participant accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes (allocations) that are tailored to different time horizons. The L Funds are rebalanced to their target allocations each business day. The investment mix of each fund adjusts quarterly to more conservative investments as the fund’s time horizon shortens. There are 5 different Lifecycle Funds targeting retirement dates through 2050.
While there are not many options to choose from, these options cover most types of major indexes and have very low fees. In 2016, the administrative expenses for all of these funds was .038% per year ($0.38 per $1,000). That is very low!
Fewer fund choices also make it easier for investors to begin investing. Studies have shown that too many investment choices in a 401k plan can lead to inaction and cause may investors not to participate.
Managing Your Thrift Savings Plan
Managing your TSP is easy if it is your only investment account. Otherwise, you will need to consider your entire portfolio before making changes in your TSP. Be sure to consider your TSP, other employer sponsored retirement accounts such as a 401k, Roth and Traditional IRAs, and taxable investment accounts.
As you can see, managing your TSP is easy when you are starting out, but it can quickly become complicated.
I use a free online software program called Personal Capital to help manage my investments. Personal Capital makes it easy to link your investment accounts and see an overview of all your investments in one location. Their free tool also analyzes your asset allocation, which you can then use to rebalance your portfolio. It is a very powerful tool!
Learn more about managing your Thrift Savings Plan, including screenshots and advanced tips. Learn more about Personal Capital or sign up for a FREE account.
Why You Should Participate in the Thrift Savings Plan
The TSP is a great way to invest for retirement. It offers a sufficient number of investment options for a well-diversified portfolio, and civil service members receive a generous match of up to 5% of their pay. Service members under the High-3 or previous retirement plans are not eligible for matching contributions. However, the Thrift Savings Plan is a key component of the Blended Retirement System. TSP participants under the BRS will receive the same matching limits as their civilian counterparts, or up to 5%.
The Thrift Savings Plan also offers extremely low management fees, even lower than industry leaders, such as Vanguard, Fidelity, and Charles Schwab.
But the best reason to participate in the TSP is you. You are in control of your financial future, and the TSP is one tool you can use to make that future better. I encourage everyone who is eligible to participate in the TSP to do so, even if they are planning to remain in the military until retirement. Military retirement pay is awesome, but it never hurts to have a little extra money when you reach retirement age.
Thrift Savings Plan Podcast Episode: I love the TSP so much, I had a guest on our podcast to discuss the benefits of investing with the TSP. It’s a great overview of how the TSP works, and why eligible members should participate. This was the first podcast I recorded, and I did have some technical issues, so go easy on the quality! Listen to the TSP Podcast Episode.