Are you a member of the military or a federal employee? Here’s what you should know about Thrift Savings Plans. Plus, new changes just went into effect in September 2019.
Are you a member of the military or a federal employee and looking into savings strategies? Have you thought about a Thrift Savings Plan (TSP)?
The TSP is a retirement savings and investment vehicle created in 1986 by Congress for federal employees and military personnel, including the Ready Reserve. TSPs offer the same types of savings and tax benefits as the 401(k) plans that many companies offer their employees.
Just like a 401(k), a TSP is a defined contribution plan, so the retirement income you get from the account depends on how much you (and your agency, if you’re eligible to receive agency contributions) put into your account during your working years, plus the earnings accumulated over that time.
There are two ways you can fund a TSP. One is through regular employee contributions, and the other is through catch-up contributions for participants age 50 or older. The maximum contribution limit for 2020 is $19,500 for regular contributions, plus $6,500 for catch-up contributions.
Members of the Federal Employee Retirement System or the Blended Retirement System (where members can choose a pension, TSP, or both—military personnel are automatically enrolled in this system) receive a 1% contribution from the agency where they work or as service members. Participants who contribute 5% each pay period will receive a matching 4%, according to the TSP website. Between the two matches, participants can potentially double their savings amount. Participants have the choice to open a traditional TSP and a Roth TSP, subject to the contribution limits. The Roth TSP acts like a Roth 401(k), in which the participant pays taxes up front, but withdrawals in retirement are tax free at the federal level.
Dara Luber, senior manager, retirement at TD Ameritrade, said low fees can be one of the benefits of these savings plans.
Investment selections in a TSP are limited but cover most types of basic investments people use. Members have a choice of “lifecycle funds,” which are similar to target-date funds (funds that allow investors to pick a portfolio matched to the year they plan to retire, starting with more aggressive investments but getting more conservative over time), plus a G Fund, which invests in government securities. The F Fund is a fixed-income fund that aims to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. There are three equity funds:
And as with a 401(k), participants can take loans out of their TSPs. But as usual, the loan is subject to taxes and a possible 10% penalty. A TSP loan can be general purpose, which must be paid back in one to five years, or the loan can be used to buy a home, in which case the loan needs to be repaid in one to 15 years.
Participants who are active military can make an in-service TSP withdrawal, but that has special rules. You can’t return or repay the money you remove from your TSP account, and you still need to pay taxes and a penalty.
In 2017, the TSP Modernization Act was signed into law, with the intended purpose of adding flexibility to TSP account withdrawals. These rules went into effect September 15, 2019. A full rundown can be found on the tsp.gov website, but here are a few highlights:
Ready to join civilian life? Similar to a 401(k), you can leave your account with the TSP, roll it into an eligible employer plan, roll it into an IRA, or cash it out. But as with any investment decision, each person needs to figure out their own needs.
“You have to take into account many of the same things you would with a 401(k) rollover,” Luber said. “Before you decide to roll over a TSP, be sure to do your research and talk to a qualified tax advisor to make sure that it’s the right decision for you.”
You can learn more about Thrift Savings Plans and the associated investment choices by visiting www.tsp.gov.
All investments, including investments in a TSP account, involve risk, including loss of principal.
Read the Q&A and Fact Sheet from the TSP website
Debbie Carlson is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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