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What Is a Thrift Savings Plan?
The Federal Employees' Retirement Security Act of 1986 established the Thrift Savings Plan, or TSP. It is a qualified retirement plan for federal employees and members of the uniformed services. The Thrift Savings Plan is a defined contribution plan similar to a 401(k), which is a plan offered by companies in the private sector.
Key Takeaways
- Thrift Savings Plans (TSPs) are retirement plans for federal employees and members of the uniformed services.
- They are similar to 401(k) plans in that contributions are pretax and may receive matching contributions.
- Government employees can contribute up to $23,000 to a TSP in 2024. If they are 50 or older, they can contribute an additional $7,500 each.
- Savers have the option of choosing among five core funds or a target-date fund (TDF) that combines percentages of the five core funds.
- As with other types of retirement plans, the most important thing is to start early.
Understanding a Thrift Savings Plan
The Thrift Savings Plan was introduced in 1986 through the Federal Employees Retirement System Act. A TSP allows federal workers to invest in a tax-advantaged retirement account. Much like an individual retirement account (IRA), there are traditional TSPs, in which money is taxed when you withdraw it, and Roth TSPs, where you pay taxes on contributions but the earnings are tax-free.
Unlike IRAs, the contribution limits are quite a bit higher. In 2024, you can deposit $23,000 to a TSP, unless you're 50 and over, in which case the limit is $30,500 for the year.
After two years, most employees in a TSP are eligible for a full match of up to 5% of their salary. That's free money.
If you are part of the Federal Employee Retirement System (FERS) or the Blended Retirement System (BRS), your agency may match your contributions. Most agencies automatically contribute 1% of your salary to a TSP and an additional 4% after two years of service.
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Investopedia / Jake Shi
Investing in a TSP
The Thrift Savings Plan accepts rollovers from previous retirement plans such as a past 401(k) or IRA. Likewise, if a participant terminates employment and goes to work in the private sector, the Thrift Savings Plan account can either remain intact or be rolled over into the new employer's plan or to a traditional IRA.
Although the Thrift Savings Plan is limited in its available investment options, it does offer a low-cost way for government workers to save efficiently for retirement. As with other qualified retirement plans, the participant can choose and allocate any percentage of their account assets into any desired funds.
The available funds are below.
Individual Funds
- The G fund, which invests in government securities, such as Treasurys
- The F fund, which invests in corporate and government bonds
- The C fund, an index fund representing the S&P 500
- The S fund, a small-cap stock index fund—riskier than the C fund, with higher potential gains
- The I fund, an international stock index fund that mirrors the MSCI EAFE Index—the riskiest individual fund, with the highest potential returns
Lifecycle Fund
A sixth choice is to invest in one of the 11 Lifecycle, or L, Funds, containing a percentage of all five individual funds. As the chosen Lifecycle Fund approaches maturity and the fund holder's retirement year, the funds in the portfolio are rebalanced toward less-risky assets.
What Is the Contribution Limit for the Thrift Savings Plan?
The annual contribution limit for the Thrift Savings Plan is $23,000 in 2024. If you are 50 and older, you can contribute an additional $7,500 for the year.
What Is the Difference Between a Thrift Savings Plan (TSP) and a 401(k)?
The Thrift Savings Plan is a qualified retirement plan for federal employees and members of the uniformed services. A 401(k) plan is a qualified retirement plan for the private sector. Both plans have the same contribution limits and are structured similarly, but there are some differences.
What Happens to My Thrift Savings Plan if I Quit My Job?
If you quit your job, your Thrift Savings Plan will remain as is if the balance is $200 or more, and it will continue earning. You can control the account and make adjustments to your investments but you can't make any more contributions. In addition, you can request a distribution of all or a portion of your account and put the money in another retirement account.
Can You Withdraw Money From Your TSP Account While Still Working?
Yes, but there are several restrictions to doing so. There are two types of in-service withdrawals: financial hardship withdrawals and age 59 1/2 withdrawals. When you make an in-service withdrawal, you permanently reduce your TSP account by the amount you take out, and you also give up any future earnings on that amount. Once the withdrawal is made, you can't return or repay the money to your account, and you can't convert your withdrawal to a loan. Also, be aware that you must pay federal and, in some cases, state income taxes on the taxable portion of your withdrawal. If you make a financial hardship withdrawal before age 59 1/2, you may also have to pay a 10% early withdrawal penalty tax.
The Bottom Line
A Thrift Savings Plan is a major component of compensation for employees of the federal government and armed services. Not only does it provide a tax-advantaged form of retirement savings, but the government also will match employees' contributions to help them save for retirement. As with other retirement plans, the most important thing is to start early.