Private-Sector vs. Government Retirement Plans

The Thrift Savings Plan (TSP) is a retirement savings and investment plan specifically designed for federal government employees and members of the military. It serves as the federal counterpart to the private sector's 401(k) plans, offering government workers a tax-advantaged way to save for retirement.

A TSP account operates similarly to a 401(k) in that money is put in before it’s taxed, with the understanding that you’ll pay taxes on the funds when you withdraw them. With more than 6.2 million members and total assets of $600 billion, TSPs make up a sizable chunk of retirement savings accounts in the U.S.

What is a TSP?

The Thrift Savings Plan, established in 1986, is a defined contribution plan similar to a 401(k) or 403(b). Employees contribute pre-tax dollars, and the funds grow tax-deferred until retirement when withdrawals are taxed as ordinary income. The TSP is a core component of the Federal Employees Retirement System (FERS), including a basic pension and Social Security benefits. Federal employees can manage their TSP accounts and make adjustments through their agency's employee benefits department.

Thrift Savings Plan Eligibility

To have a TSP retirement package, you’ll need to be classified in one of four federal government worker categories:

• Employees enrolled in the Federal Employees Retirement System (FERS): for employees who started work on or after January 1, 1984.
• Employees enrolled in the Civil Service Retirement System (CSRS): for employees who started work before January 1, 1984, and did not convert to FERS.
• Members of the uniformed services: Active Duty or Ready Reserve.
• A civilian in other categories of federal government service

To qualify for TSP retirement benefits, federal employees must typically be "vested" after three years of service. Vesting means you have earned the right to retain your retirement benefits, including your employer's automatic 1% contributions to your TSP account. If you leave federal service before completing the three-year vesting period, you forfeit these automatic contributions and any earnings on them. However, any contributions you make to your TSP are fully vested from the start and remain yours regardless of your length of service.

Roth TSP and after-tax contributions

Initially, TSP contributions were limited to pre-tax funds. However, qualifying government and military employees can now contribute to a Roth TSP. This option allows you to contribute after-tax dollars, meaning your withdrawals during retirement will be tax-free.

While a Roth TSP can reduce your tax burden in retirement, it's important to consider your future tax bracket. Many assume they will be in a lower tax bracket after retirement due to reduced income, but this may not always be true. Paying taxes now can help ensure financial security in retirement and protect against potential adverse changes in tax laws. If you're currently participating in a traditional TSP, you can convert future contributions to a Roth TSP anytime. However, this conversion only applies to contributions made after the conversion date, not funds already in your account.

Contribution limits for TSPs

Like all retirement savings accounts, TSPs have contribution limits set by the Internal Revenue Code. For 2024, the contribution limits are as follows:

• Employee Contribution Limit: Up to $23,000 per year.
• Total Contribution Limit: Employee and employer contributions, up to $69,000 annually.
• Catch-Up Contribution: If you're 50 or older, you can contribute an additional $7,500 annually.

These limits also apply to uniformed servicemembers. However, the limits do not apply to any tax-free contributions made from combat pay if you serve in a combat zone. Uniformed servicemembers serving in combat zones can contribute more to their TSPs due to the special tax treatment of combat pay, allowing them to build their retirement savings more effectively during their service in those areas.

How employee contribution matches work

For employees under FERS and BRS, the federal government automatically contributes 1% of your basic pay to your TSP account, regardless of your contributions. To maximize your TSP, take advantage of the matching contributions offered by your agency. Your agency matches dollar-for-dollar up to 3% of your pay and $0.50 on the dollar for the next 2%, for a total match of 5%.

Experts recommend contributing at least 5% of your paycheck to your TSP to receive matching contributions. This is free money that boosts your retirement savings. While you can contribute more than 5%, it's worth comparing the returns on additional TSP contributions to other investment options.

Final Thoughts

The 5% matching contribution makes the Thrift Savings Plan a valuable investment vehicle for federal employees and military members. However, consider whether to contribute beyond the match limit. Consulting with a Certified Financial Planner® can help you determine the optimal contribution amount and maximize your TSP. Federal employees should also connect with their agency's retirement plan contact to ensure they fully leverage the benefits.

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