Everything Federal Employees Need to Know About the Thrift Savings Plan (TSP)

Everything Federal Employees Need to Know About the Thrift Savings Plan (TSP)

October 04, 2022
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With many similarities to a 401(k) plan, TSPs are offered to federal employees and uniformed service personnel, and are a great tool for retirement. But maximizing your employee benefits with a TSP can be a confusing endeavor. All plans are not created equal, and reading the fine print and absorbing the small details can be a challenge. Here’s what you need to know to make the most of your thrift savings plan.

The Basics: How a Thrift Savings Plan Works

Just like a 401(k), a TSP offers participants the opportunity to divert some of their income into a defined contribution program. For federal employees, the government contributes money an employee designates into a retirement account on their behalf. 

There are both traditional TSPs and Roth TSPs available. Having a traditional TSP means that your contributions, employer match, and investment growth are all pre-tax. When you make a withdrawal down the road, the taxes will be due based upon the applicable tax rate at the time you take the money out. 

Roth TSP accounts are post-tax, so all contributions are taxed as income at the time the contributions are made. The benefit, however, is that no tax will be due at the time you withdraw on either your contributions or your growth. It should be noted that all employer matches can only be made in a traditional account. This will result in having both a Roth and a traditional account open if you choose to make contributions into a Roth.

How Do Contributions Work?

The contribution limit for the TSP is $20,500 in 2022, with a $6,500 catch-up contribution available for employees over age 50. (1) RMDs start at age 72 for traditional versions of both account types, though the TSP allows you to sidestep this if you haven’t yet retired from your federal employment. Note - experts predict that contribution limits will increase to $22,000 in 2023, but this has not yet been confirmed. (2)

Like many employers, the plan offers a match, up to 5% when an employee also contributes 5% (a full match on the first 3%, and a 50% match on the last 2%). This is in addition to the automatic 1% contribution your agency makes on your behalf each pay period. (3) For this reason, make sure you change your automatic deduction to 5% to take full advantage of this benefit. 

You become vested after either two or three years, depending on which branch of the government you work for. 

What About My Plan Options? 

One stark contrast we see between 401(k) accounts and the TSP is the wide variety of investment options available to most 401(k) plans, versus the slim choices available to the TSP. The TSP offers significantly fewer investment options than the average 401(k) plan. (4) While stable and typically very conservative, the lack of options may leave some employees feeling like they have a lack of control over their portfolios. 

More recently, the TSP has started offering mutual funds as a way to expand the available investment options. However, there are additional costs that may make mutual funds less attractive to the average TSP investor. For instance, you’ll need to: (5)

  • Maintain a $40,0000 minimum balance
  • Make a minimum initial investment of $10,000
  • Pay a $55 annual administrative fee
  • Pay a $95 annual maintenance fee
  • Pay a $28.75 per-trade fee
  • Pay other fees and expenses specific to the mutual funds you choose

As with every investment, there are trade-offs no matter what you choose. Sticking with the traditional TSP investment options (index funds and lifecycle funds) can offer a much lower cost alternative to TSP mutual funds and other investments offered through 401(k)s. In fact, 401(k)s can often have high and sometimes hidden maintenance and administrative fees. With relatively low fees, the TSP participant often enjoys the opportunity to keep more of their contributions growing for their retirement.

Beyond the Basics of a TSP

TSPs are multi-dimensional. If you want to learn more ways to maximize your opportunities, consider partnering with a professional to help you navigate your options. We at Anderson Financial Strategies know financial strategies are complicated and we want to help you become organized and focused. Let’s set up your TSP in a way that will work best for your unique situation. If you’d like to explore our services for your family or business, please call us at 855-237-4545 to schedule an executive briefing to discuss your goals.

About Shon

Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 15 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni advisor and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.

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(1) https://www.tsp.gov/making-contributions/contribution-limits/

(2) https://401kspecialistmag.com/2023-401k-contribution-limit-forecast-milliman-predicts-record-jump/

(3) https://www.tsp.gov/making-contributions/contribution-types/

(4) https://www.employeefiduciary.com/knowledge-center/thrift-savings-plan

(5) https://www.tsp.gov/mutual-fund-window/