The Thrift Savings Plan is exclusive to federal employees, and it can help you fund your retirement.
The TSP can be confusing, especially if you haven’t been given the proper information regarding its use and its ability to help you in retirement from your federal job. If you’re not sure exactly what we’re talking about, that’s okay. Just know that you aren’t alone, and we’re here to help.
We can answer some of your biggest questions about TSP as a federal worker, even if you aren’t sure what questions you have yet. We’ll start with the basics by discussing what the TSP is, how contributions are made to your TSP, the different types of funds available, how much you can contribute each year and how the government matches your contribution.
What is TSP?
TSP stands for Thrift Savings Plan. The concept was established at the inception of FERS in 1986. It works very much like a 401(k) does for employees of private corporations, but it is offered exclusively to federal workers. Simply stated, it is a retirement and investment fund that can function as a second income stream in retirement in addition to your pension.
Currently federal employees are automatically enrolled in TSP when they’re hired. Auto-enrollment designates 5% of your base pay to your TSP account through payroll deductions. Additionally, the government agency or branch of service you work for also contributes to your account at around 1% of your base pay rate.
There are multiple options for TSP accounts, including which funds you invest in. You can also decide whether you will pay income taxes now or in the future by selecting a traditional or Roth option.
A traditional TSP account collects pre-tax dollars and is tax-deferred. When you withdraw money from this account after you retire, the withdrawals (also called distributions) can begin without penalty at age 59-1/2 and are subject to income taxes. Contributions to a Roth TSP account are made with post-tax dollars. All withdrawals, including any account gains, are generally tax-free during retirement if you satisfy IRS requirements.
What are the different types of TSP funds?
There are five different core TSP funds that federal employees can choose from. All five funds are managed by Blackrock Capital Advisers and are available only to TSP participants.
Your investment options are designed so you can choose either the L Fund that is appropriate for your time horizon, or a combination of the other four individual TSP funds that will support your personal investment strategy or mix.
In order of most to least conservative, the five main funds are: G Fund, F Fund, C Fund, S Fund and I Fund. The G Fund puts its contributions into government securities. The goal of the G Fund is to outproduce inflation while avoiding risk. The F Fund is the combination of government and corporate bonds to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. The C Fund puts its contributions toward large-cap U.S. stocks to match the performance of the S&P 500. The S Fund mixes small and mid-cap U.S. stocks to match the Dow Jones. The I Fund uses large-cap foreign stocks in an attempt to match the performance of the MSCI EAFE Index.
The L or Lifecycle funds are composite funds that invest in a combination of the five core funds and act like target-date funds by nature. They are designed and managed by the portfolio managers at Blackrock Capital and function as “automatic pilot” funds for participants who do not wish to make their own asset allocations.
If you are auto-enrolled, the automatic selection is your age-appropriate L fund.
Who can contribute to TSP?
The groups that may contribute to TSP include: FERS employees, CSRS employees, uniformed service members, civilians in other federal jobs such as justices and judges, and full-time federal employees. Part-time federal employees and contractors are not eligible for TSP.
TSP is voluntary. If you’re unsure if you’re currently enrolled or how much you are contributing, you can check your paystub.
What are the contribution limits?
In 2022, each eligible and enrolled federal employee may contribute $20,500 annually to their TSP. Federal employees over 50 years old may also contribute an extra “catch up” amount of $6,500. The contribution limit typically increases each year to keep up with COLA and inflation. For example, in 2021, the contribution limit was $19,500 per employee. The limits apply to both traditional TSP and Roth TSP accounts.
What is the government’s policy regarding matching funds?
The first 5% of an employee’s salary is matched to some degree. The first 3% contributed by the employee to either type of TSP is matched dollar for dollar by the government, and the other 2% is matched at 50 cents per dollar. Employees may contribute more, all the way up to the annual limit, but contributions above 5% of an individual’s salary are not matched.