Thursday, November 10, 2011

Introduction to the Thrift Savings Plan

The Thrift Savings Plan (TSP) is a retirement plan for U.S. government employees, established in 1986. In many ways, it is similar to a 401(k) plan. Its purpose is to provide retirement income to U.S. Government employees. Almost 5.8 million government employees participate in the plan.

The TSP is offered to employees covered by the Federal Employees Retirement System (FERS), Civil Service Retirement System (CSRS) and members of the U.S. military. The TSP is managed by the Federal Retirement Thrift Investment Board, with administrative and day-to-day assistance from several private sector companies.

The TSP is a defined contribution plan, which means that you determine how much of your salary to contribute, and these contributions go into your personal TSP account. As such, your retirement benefits are the result of your personal investment choices: how much you contribute and which TSP funds you invest in (how much your investments gain in value) during your federal employment. This contrasts with a defined benefit plan, where your employer stipulates a monthly benefit or pension at your retirement.

Benefits of the TSP

There are several major benefits of enrolling in the TSP. Contributing a a portion of your earnings to the TSP actually lowers your taxes. This is due to the fact that the contributions you make are "pre-tax": no payroll tax is deducted, and the money goes directly into your TSP plan. This reduces your taxable income by the amount which you invest in the plan. There's an annual limit to the amount you can contribute, but it's a tidy sum: $16,500 in 2011 and $17,000 in 2012. Participants in private sector 401(k) plans are subject to the same annual contribution limit, and the amount is increased every couple of years to adjust for cost of living increases. Also, any investment gains on the money in your TSP account won't be taxed until you start making withdrawals during your retirement.

If you're a FERS employee you're also entitled to receive matching contributions. Simply put, for every dollar you contribute to the TSP, your agency will make a matching contribution, up to a maximum 4% of your salary. The regulations are somewhat complicated and subject to some limitations, so check the details with your agency personnel office. Unfortunately, Civil Service Retirement System (CSRS) employees are ineligible for matching contributions.

If you got off to a late start with your retirement savings or want to invest more, and you're fifty years or older, you can make catch-up contributions to your TSP account. The annual catch-up contribution limit is adjusted every few years, but currently you are able to add an extra $5,500 catch-up amount to your TSP every year, in addition to the usual annual limit.

It's very straightforward to roll over existing IRA and 401(k) assets into your TSP account, or to transfer your TSP assets to a private sector retirement plan when you end your federal career. Under certain conditions, you can even obtain a loan (borrow against your TSP assets), or make financial hardship or age-based withdrawals before your planned date of retirement. Always seek advice from a financial professional and your agency personnel office if you're considering any of these actions, in order to avoid unexpected consequences.

TSP Investment Options

The Thrift Savings Plan offers 10 different funds for employees to invest in. Five of the TSP Funds are U.S. and international stock and bond index funds. They mirror the performance of broad market indexes, and contain a diversified portfolio of thousands of individual stocks and bonds. The other five TSP funds, the Lifecycle Funds, are professionally managed portfolios which consist of a mix of the 5 primary TSP index funds. You select one of the Lifecycle Funds based on the target date: approximately when you plan to start making TSP account withdrawals (typically during your retirement). The asset mix of each Lifecycle Fund is slowly adjusted to be more conservative (fewer stocks and more bonds) as its target date approaches.

In summary, the Thrift Savings Plan is a excellent retirement plan, and federal employees would be smart to max out their TSP account every year.