Thrift Savings Plan (TSP) Accounts were created in 1986 as part of the Federal Employees Retirement System (FERS). They are defined-contribution plans that are held in a fund known as the Thrift Savings Fund, administered by the Federal Retirement Thrift Investment Board (FRTIB).
In essence, TSPs were designed to replace the traditional pensions of the old Civil Service Retirement System (CSRS). Instead of the traditional defined-benefit pension from the CSRS, TSPs give civil service employees the equivalent of private-sector 401(k) programs as part of a three-pronged savings approach.
Those who that retired before 1987 and chose not to convert to FERS coverage are still covered by traditional pensions through CSRS. Those who converted, along with all new hires from 1987 forward, are covered by a combination of a smaller pension, Social Security benefits, and TSPs – all individually smaller but intended to approach the coverage of a traditional pension.
Once you are signed up with a TSP account, there are three contribution elements:
- Automatic Contributions – If you are covered by FERS, you receive a regular deposit of 1% of monthly salary in your TSP accounts. This is above your salary, not drawn from it.
- Voluntary Contributions – You are defaulted into a 3.0% contribution of your salary, but you may opt out of it or change the amount up to limits determined by the IRS. After age 50, you can make extra "catch-up" contributions. Calculators are available on the TSP website to help you see the effect of different contribution levels over time.
- Matching Contributions – All participating agencies match the employee contributions up to a 4.0% contribution level. Matching is dollar for dollar on the first 3% and fifty cents to the dollar on the next 2%, adding up to 4% matching (effectively 5.0% including the automatic contribution). As a general rule, Uniformed Services or CSRS members do not receive matching contributions.
IRS contribution limits are subject to change annually, but in 20142014, they are $17,500 for voluntary contributions and $52,000 for combined contributions in a year. Catch-up limits are $5,500; they do not count toward the annual total.
As with IRA's, TSP’s they are funded with pre-tax dollars, thus the money is taxed when withdrawn during upon retirement – presumably at a lower tax rate than during your working years. However, beginning in 2012, FERS employees can take their voluntary contribution component as a Roth contribution. Similar to a Roth IRA, taxes are paid upfront (also out of your paycheck) and the Roth component of your TSP can be withdrawn tax-free at retirement – as well as the earnings from that component, if you meet the qualifications.
You can roll existing traditional (not Roth) IRAs into TSPs to consolidate your savings plans. Once you leave government service and meet qualifications, you can roll your TSP into an IRA as well – although TSPs have unusually low expense ratios, so it might be best to keep it intact.
You have six basic TSP investment options:
- L Funds – The "autopilot" option. These are target date funds that are risk-managed for you based on your intended retirement date. All other funds require individual choices, and are presented below in increasing order of risk.
- G Funds – Conservative investment in short-term US Treasury issues. They are guaranteed not to lose money but provide limited interest growth opportunity due to the generally low interest rates they pay.
- F Funds – Bond funds that track the Barclays Aggregate bond index. As with any bond fund, risk is lower than stocks but higher than T-bills, as bonds fluctuate in principal value based on interest rate movements and possible credit downgrades to issuers.
- C Funds – Stock funds tracking the S&P 500, large- and medium- cap companies – mostly blue chips with moderate risk.
- S Funds – Small- to medium- cap stock funds designed to match the Dow Jones TSM index, incorporating higher risks and potential returns compared to S funds.
- I Funds – International funds – considered by many experts to be the highest risk option within TSPs, but sticking with developed countries. They are targeted to match the Morgan Stanley Capital International Stock Index.
A very helpful brochure, "Summary of the Thrift Savings Plan", is available from the TSP website. It goes into significant detail about each aspect, and is recommended reading if you want a deeper understanding of the options. If you still have questions, contact the TSP directly using the information on the website.