Understanding Thrift Savings Plans [2024]

Thrift Savings Plans are retirement plans offered to federal employees and uniformed service members. These plans mirror 401(k) programs provided to employees in the private sector. [1]

Key aspects of Thrift Savings Plans (TSPs):

• Contributions are either pre- or post-tax. Participants can contribute to the plan with their tax needs in mind. With Traditional contributions, they could lower their tax burden in the present with pre-tax contributions but pay taxes when they withdraw the money later. And with the Roth version, they would face no taxes at distribution but pay taxes on the income in the present. [2],[3]

• Most employees of the United States government are eligible to participate in TSPs. You can contribute to a TSP account if you are a part of the Federal Employees Retirement System (FERS) hired on or after January 1, 1984, if you are covered by the Civil Service Retirement System (CSRS) hired before January 1, 1984, and did not convert to FERS, if you are a member of the uniformed services (active duty or Ready Reserve), or if you are civilian in specific categories of government service. Participants must also be actively employed by the federal government as a civilian employee or member of the uniformed services, in a pay status to contribute, and working full- or part-time. 2
• For FERS or BRS employees, their agency or service will contribute an amount equal to 1% of your basic pay each pay period to the employee’s TSP account. These contributions are called Agency/Service Automatic (1%) Contributions and are made whether the employee makes contributions or not. If an employee contributes, their agency or service will match the first 5% of pay you contribute every pay period. The first 3% is matched dollar-for-dollar by your agency or service; the next 2% is matched at 50 cents on the dollar. 2
• Members of uniformed services can contribute from 1% to 100% of any incentive pay, special pay, or bonus pay if they choose to contribute beyond the automatic Agency/Service Automatic (1%) Contributions. However, they cannot contribute from sources such as housing or subsistence allowances. 2

Image Source: https://www.tsp.gov/publications/tspbk08.pdf 

• There are three ways the employee can invest their TSP account: choose their own mix of investments from individual TSP investment funds (G, F, C, S, and I Funds), a Lifecycle Fund, or invest with the Mutual fund window. Lifecycle Fund is a predetermined ratio of all the funds, which changes as you age. Investing with the Lifecycle Fund option, your investment risk tolerance adjusts automatically, growing more conservative as you near retirement. In the Mutual Fund Window option, you can invest some of your TSP savings in the mutual funds of your choice through the mutual fund window, given that you meet the eligibility criteria and pay the required fees.2,5,[6]
• With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.
• Vesting is when you must stay with an employer to keep any money they match. FERS employees in congressional and certain noncareer positions and BRS members become vested in Agency Automatic (1%) Contributions after two years of service. 2
• Fees depend on which funds the employee is invested in. [7]
• If you leave an employer, you can take your money with you. These types of accounts can move into 401(k) plans, IRAs, or other like tax-type accounts. 3

• The earliest you can take penalty-free withdrawals is 59 ½; the penalty is an extra 10% on top of the taxes collected. However, there are some Financial Hardship Withdrawal exemptions to the early withdrawal penalty- if you are experiencing Negative Cash Flow or Extraordinary Expenses, it can include certain medical expenses, personal casualty losses, or legal expenses. These Financial Hardship Withdrawals have rules regarding if the money is vested, what it can be used for, and how often it can be taken. [10]
• You can take a low-interest loan on your TSP account for two reasons: A general-purpose loan with a repayment period of 1 to 5 years or a Residential loan; this loan is only for the purchase or construction of a primary residence and will need to be repaid within 1 to 15 years.[11]
• You must designate a beneficiary within the TSP plan to pass your TSP account after death. TSP plans will not honor a will or any other document. If you haven’t designated a beneficiary, there is a set precedence by law.[12]
• Anyone employed after October 1, 2020, was automatically enrolled into a TSP account with an employee Traditional (pre-tax) contribution set to 5%. Between August 1, 2010, and September 30, 2020, new hires and rehires were automatically enrolled at 3%. Employees can change their contribution rates, stop contributing, and/or switch their contribution tax designation from Traditional to Roth (pre- to post-tax). Those in the uniformed services participating with the Blended Retirement System who elect to stop contributing will be reenrolled automatically every January 1 and will have to resubmit their wishes not to participate every year. 2
• In 2022, there was an effort to modernize the TSP system by:[13],[14]
  • Offering a mobile app.
  • Enhancing cybersecurity for online accounts.
  • Offering a “concierge” service to help participants roll money into their accounts. Also, it is a way to make it easier for participants to manage their money with online forms, electronic signatures, the ability to digitally scan checks, pay loans online, and live customer service reps 24/7.
  • Presenting a more extensive range of investment choices. The mutual fund window option allows eligible participants to invest in thousands of mutual funds.[15]

If you want to explore investment accounts that would work for your personal or retirement goals, Scarlet Oak Financial Services can be reached at 800.871.1219 , or you can contact us here.  To sign up for our weekly newsletter with the latest economic news, click here. 

Sources:

[1] https://www.investopedia.com/terms/t/thrift_savings_plan.asp

[2] https://www.tsp.gov/publications/tspbk08.pdf

[3] https://www.tsp.gov/publications/tsp-536.pdf

[4] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000

[5] https://www.ramseysolutions.com/retirement/what-is-the-thrift-savings-plan

[6] https://www.tsp.gov/investment-options/#:~:text=need%20your%20money.-,Individual%20TSP%20funds,made%20of%20stocks%20and%20bonds

[7] https://www.tsp.gov/tsp-basics/administrative-and-investment-expenses/

[8] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmd

[9] https://www.tiaa.org/public/support/faqs/required-minimum-distributions

[10] https://www.tsp.gov/publications/tspbk12.pdf

[11] https://www.tsp.gov/publications/tspbk04.pdf

[12] https://www.tsp.gov/publications/tspbk08.pdf (pg. 19)

[13] https://stwserve.com/tsp-2022-contribution-limits/

[14] https://federalnewsnetwork.com/mike-causey-federal-report/2021/11/new-features-coming-to-the-tsp-heres-what-you-need-to-know/

[15] https://www.tsp.gov/publications/tspfs28.pdf

This material has been prepared for informational purposes To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.