Your Thrift Savings Plan: What You Don’t Know (But Should)

Most articles that highlight on retirement planning emphasize on 401(k)s. However, federal employees and military service members save for their retirement using a different type of account referred to as the Thrift Savings Plan or TSP.

In one way or another, the functioning of TSPs is similar to 401(k)s. An individual makes their contribution, and your employer may decide to match the offer. The limit for annual contribution is also $18,500 and an additional catch-up of $6,000 for individuals that are 50 years or older.

Also, similar to most 401(k)s, both traditional and Roth options are offered by TSPs. Based on a traditional TSP, in retirement, you make pre-tax contributions and pay taxes on withdrawals. Those that elect the Roth option, they would contribute post-tax income, and it is not necessary to pay tax on withdrawals.

It is possible to hold at the same time a traditional and Roth TSP. The interesting monition is that matching contributions by the government can only be made into a traditional TSP.  Therefore, even if you only make contributions to a Roth TSP, you can still have both types of accounts and also enjoy other benefits of a few tax diversification.

The Way TSPs Function for Different Kinds of Employees

There can be some slight differences in your TSP account. This will depend on whether you served in the military or you are a civilian government worker:

Federal Workers

-Federal Employee’s Retirement System (FERS): FERS employees are considered as federal civilian employees that were hired on January 1, 1984, or after. FERS employees that were employed after July 31, 2010, are enrolled automatically in a traditional TSP. Unless individuals opt to change or stop the contributions, 3% of their basic pay is deducted and deposited to their account. FERS employees that were employed before August 1, 2010, they have a TSP that receives a 1% contribution from their agency, and they can decide to contribute more as well.

-Civil Service Retirement System (CSRS): This is a federal civilian employee’s retirement system to individuals that were hired prior to January 1, 1984. Your agency establishes the CSRS employees’ account after individuals make a contribution election.

Military

Since 80% of uniformed military service members do not stay in the military for the 20 years required to become eligible for a pension, the majority are walking away from the service with no funds for retirement. Enactment of the Blended Retirement System was done to change that. It allows service members to select a pension or a TSP, or have both. The appropriate option for the individual will depend on their current years of service.

Any person that is joining the military is automatically enrolled in the BRS. You will get 1% of your base pay automatically contributed to a TSP, and individuals can opt to contribute an added 4% to receive a total match of 5%. You will still receive a pension in case you complete the necessary 20 years of service, but it is going to be a reduced one.

If you have over 12 years of service, to only have pension can turn out to be a better option since the 5% match on a TSP is not going to offset the higher pension you will get to have no TSP at all.

The gray area is to military members that have 8 to 12 years of service. Deciding to stay in the old system or switch to the BRS will depend on your personal situation.

Investment Choices for Your TSP

You have a choice in five index funds or different lifecycle funds that are composed of a combination of the five index funds. While these are considered as far few investment options that the majority of employers offer in their 401(k)s, to choose between less number of options is mainly less confusing.

– G Fund: As its name states, the Government Securities Fund is invested in the government securities of the U.S. It mainly provides lower volatility, and it is possible for individuals to earn interest income without fearing to lose their principal income.

– F Fund: The Fixed Income Fund is usually invested in either the government, corporates, or mortgage-backed bonds, and it aims to match the performance of the Bloomberg Barclays Aggregate Bond Index. The fund usually offers risk that ranges from low to moderate.

– C Fund: The S&P 500 that is composed of U.S. companies ranging from medium and large matches the Common Stock Index Fund. This fund provides a moderate risk.

– S Fund: Due to investing in small and medium U.S. companies that are not in the C Fund, the Small Capitalization Stock Index Fund is slightly riskier. The fund is matched with the Dow Jones U.S. Completion Total Stock Market Index.

– I Fund: The International Stock Index Fund is able to match with the performance of the MSCI EAFE (Europe, Australasia, Far East) Index that is composed of stocks of over 20 developed countries. This fund is more volatile compared to the C Fund.

– L Funds: Similar to lifecycle funds or target date, you can choose an L Fund in regards to your retirement time horizon. This fund is going to gradually shift from being aggressive to moderate up to conservative as a person nears close to retirement. In case you have the age of your retirement in mind, you can choose a fund that targets the year that is close to when you reach that age

A huge benefit of TSP fund choices.  They share some of the lower expense ratios that are around less than 40 cents for each $1,000 you have invested. This is huge since even with a fraction of a percent rise to a fund’s expense ratio means there will be a significantly lower retirement savings in 20 or 30 years.

If you do not settle for an L Fund, it is possible to create your own combination from the other five funds. It is essential to take into consideration your investment options carefully and select the ones that are appropriate for you. The default fund allocations are not possible to match your specific goals.

Your contributions will be deposited into the L Fund you targeted towards the year you will be reaching 62, if your enrollment in a TSP was on or after September 5, 2015. If your enrollment was prior to that date, your contributions are going to be deposited into a G Fund that may not be aggressive enough in case you have a long time horizon.

Matching Contributions

An automatic contribution of 1% of base pay is given to BRS members and FERS employees to their TSP, whether they are contributing or not. From there, each individual receives a match on their additional contributions of up to 5% of their salary.

To the majority of FERS employees, the 1% automatic contribution vests after three years. For BRS and a few FERS employees, it is after two years. The match contribution usually does not have a vesting requirement.

Selecting Beneficiaries

It is important to select your TSP beneficiaries, and ensure that the list of the beneficiaries is kept updated in the event you bear children or get a divorce.

If you have in your TSP, less than $200 once you pass away, your beneficiary is going to get the money. Those with above $200, the money will remain invested, and there is setting up of a beneficiary participant account in their own name.

Where Should You Begin?

Individuals that are eligible to participate in a TSP, it is a high recommendation that they contribute at least enough amount to receive the 5% match.

They can also contribute an amount of up to $5,500 every year to a Roth IRA if they qualify. After this, they can continue to take advantage of the ability to reduce their taxable income by contributing to their TSP an annual maximum amount of $18,500.

In case you have funds available for further investment, a person can set up a separate after-tax brokerage account.