Most people are very familiar with the term "401K", but they may have never heard of the Thrift Savings Plan (commonly referred to as TSP). In fact, both programs are similar in many ways. This article covers the basics about the TSP including its benefits and drawbacks.
What Is A Thrift Savings Plan?
The Thrift Savings Plan, or TSP, is a retirement savings plan for federal government workers and members of the military. Those who choose to enroll in a TSP get an account in which they can invest money during their years of employment. Employees get to deposit a portion of their pre-tax earnings when it is going towards their TSP. Those who are covered by the Federal Employees' Retirement System (FERS) or the Civil Service Retirement System (CSRS) are eligible for a TSP account. In any case, the TSP may be just one part of a total retirement package offered by an employer.
Money in a TSP account is much like a 401K. The money goes into investment funds that are chosen by the Federal Retirement Thrift Investment Board (FRTIB). The risk in this type of investment is low since it is managed by experts and the portfolio is very diversified.
In many cases, federal employees are automatically enrolled in the TSP program. Other agencies offer matching contributions to further bolster their employees' retirement savings. However, any member of the military or government employee should talk to their human resources department to find out more about how to get a TSP account.
Pros And Cons
Some government employees or members of the military may be concerned about the benefits of utilizing the TSP system. The following are some of the main benefits of a TSP account:
- Pre-tax earnings: Because the TSP collects pre-tax earnings, a monthly contribution to this retirement fund reduces the amount of total taxable earnings a person makes.
- Low fees: Unlike some retirement plans, the TSP program has very low fees so that those who invest get to keep more of the money they contribute.
- Transferable: Those who leave a government position or the military can roll their TSP contributions and any associated earnings into a traditional IRA or a 401K plan through a new employer. The transfer can also be made in reverse if you already have tax-deferred money in a traditional IRA or 401K.
- Matching contributions: Many government agencies match part of your contributions when you invest in a TSP.
There are not many drawbacks to using a TSP since it is a very reliable and safe investment. However, the following should be taken into consideration:
- Take-home pay: Contributing a portion of your earnings to a TSP will reduce your total take-home pay.
- Lack of control: Savvy investors may prefer to handle this type of savings plan on their own in an environment where they have more control over the investments being made with their earnings.
Withdrawing From A TSP
There may be several circumstances under which you may need to withdraw money from your TSP. Whether you are leaving government or military service, you need a loan from your savings or you're just simply ready to retire, there are certain things to consider before you make a withdrawal.
First and foremost, find out how much tax you'll owe on the money you withdraw. Generally, money withdrawn from a TSP account is subject to federal income tax and possibly state taxes as well. However, there are exceptions to that rule. Most notably, those who make a withdrawal from their TSP early may be subject to a 10 percent early withdrawal penalty tax. In addition to taxation, there may also be a waiting period when you request a withdrawal. In general, it's best to expect the process to take up to eight weeks after a withdrawal is requested. This allows time for the withdrawal forms and any necessary data from your employer to reach and be processed by the TSP Service Officer. Since the rules for taxation and waiting periods on TSP withdrawals can vary widely according to your job, your location and your personal circumstances, speak to your employer to find out more about what to expect when you withdraw from your TSP account.
One final thing to consider with your TSP account is designation. In the event of your death, the funds from your TSP account can go towards someone of your choosing. There are TSP designation forms available for this purpose. If no designation form has been signed, the payment would automatically go to the account holder's widow or widower.
The Thrift Savings Plan is generally an excellent way to save for retirement if you work for the government or are in the military. There are few drawbacks to this program and, thanks to pre-tax contributions and matching contributions, it's usually a smart financial investment. Talk to a financial advisor if you're unsure if a TSP account is right for you.