Thrift Savings Plan Overview
What Is a Thrift Savings Plan?
The Thrift Savings Plan (TSP) came into being through the Federal Employees’ Retirement System Act of 1986 (FERS). It is offered by the US Government to civilian employees and uniformed military personnel and is a tax-deferred investment plan for retirement rather like the 401(k) retirement plans offered to employees in the private sector.
The TSP is one of three elements of the Federal Employees’ Retirement System (FERS), the other two being FERS annuities and Social Security. It is run by the Federal Retirement Thrift Investment Board.
Since June 22 2009 FERS employees have been eligible to join TSP as soon as their employment begins and can choose to join either immediately or at any time later. Once the employee joins and starts contributing to the TSP (in effect deferring part of their income for retirement) they are eligible to receive matching contributions from their employer.
Since a Thrift Savings Plan is a tax deferred scheme it means that by contributing they can reduce their current taxes.
TSP Investment Options
Participants in Thrift Savings Plans have two investment options.
The first one is to invest in the Lifecycle Funds, otherwise known as L Funds. These are often referred to as ‘age-based funds’ since they are similar to the retirement date funds which are offered by independent investment companies.
The second one is to invest in the individual funds that together make up the Lifecycle Funds.
Participants can choose just one of these options, or both of them.
Lifecycle Funds (L Funds)
The name of each L fund represents the approximate year in which investors anticipate they will start making withdrawals from their Thrift Savings Plan accounts. This year is not definitely the one in which a participant will retire, however the year of retirement and the year in which they start making withdrawals are often one and the same. This is dependent upon individual circumstances and a participant may choose (and has the option) to leave money in for longer.
Typically participants take the option of investing in L Funds to make things easier for themselves. They might not have the time, experience or desire to manage the money within their TSPs through separate investments. L Funds afford them the luxury and convenience of making just one decision – when they anticipate beginning to make withdrawals – and leave the funds to take care of everything else.
The current L Funds available to participants, together with the associated retirement date timeframes, are as follows:
L2050 – Retirement date from 2045 onwards
L2040 – Retirement date from 2035 to 2044
L2030 – Retirement date from 2025 to 2034
L2020 – Retirement date from 2015 to 2024
L Income – Participants currently in receipt of monthly payments
TSP Fund Performance
According to TSP’s own data, which is based on using December 2015 prices as the benchmark, the average returns over the 10 year period 2005 – 2015 are as follows:
G Fund: 2.94%
F Fund: 4.74%
C fund: 7.36%
S Fund: 8.03%
I fund: 3.20%
What is The Maximum TSP Contribution?
The amount of contributions that you can make each year to your Thrift Savings Plan is governed by the Internal Revenue Code (IRC). These amounts change each year and are published via various TSP sources such as their website and ThriftLine. For 2017 they are as follows:
FERS and CSRS employees and uniformed military personnel
Up to $18,000. FERS and CSRS employees can contribute either a lump sum per pay check or a percentage of their income (must be a whole %, not fractional). Uniformed military personnel can contribute a percentage of income only.
The amounts selected automatically continue each year until changed by the participant. Since September 2015 new employees will contribute 3% automatically and this will be deposited into the Lifecycle (age-appropriate) Fund unless they change this.
Note: FERS employees, CSRS employees and uniformed military personnel aged 50 and over can make additional ‘catch-up’ contributions, with the 2017 limit being $6000. These additional contributions are tax deferred and for 2017 eligible participants can defer up to $24000 in their TSP. These contributions do not automatically continue however so have to be set each year by the participant.
Uniformed military personnel can make contributions from both their basic pay and from bonus or special/incentive pay, but still subject to the maximum TSB contribution limits for the year.
Those who are deployed to designated combat zones are treated a bit differently and are entitled to tax exclusion for any combat zone that encompasses tax exempt income. Their TSP contributions are tax exempt and they accumulate earnings which are tax deferred.
These tax exempt contributions are not governed by the normal IRC limits and instead are merged with their tax deferred contributions. These are bound by IRC section 415(c) and the limit for 2017 is $54000.
Participants who are both uniformed military personnel and civilian federal employees who choose to contribute when they are in uniformed and/or civilian service must have two different TSP accounts. The tax deferred total combined contributions cannot exceed the IRC normal limits however, including the catch-up limits.
The IRC section 415(c) limit of $54000 applies as well when relevant, but catch-up contributions which are made to just one of the TSP accounts or both of them are additional to the 415(c) restrictions.
CSRS employees do not receive the benefit of matching contributions.
FERS employees receive 1% of their base pay (excluding overtime or bonuses) from the day they start even if they do not contribute themselves. This is known as the ‘Agency Automatic Contribution‘.
If they do contribute, additional matching contributions are made dollar-for-dollar for the first 3% of base pay and then at 50 cents per dollar between 3% and 5% of base pay. (The 1% Agency Automatic Contribution applies in addition).
Matching contributions are not made on employee contributions exceeding 5%, nor on catch-up contributions.
Uniformed military personnel are not normally eligible for matching contributions. The only exceptions would be if the secretary of a particular service were to designate ‘critical specialties’ for that service. There have been no instances of that since 2010.
All the time you are employed the contributions you make into your Thrift Savings Plan will not incur tax until you withdraw some or all of the money. At that point federal income taxes will have to be paid. Should you opt to make withdrawals before you become eligible for retirement you could be liable for a 10% IRS tax penalty. This can be avoided in some cases however.
Different rules apply dependent upon the type and circumstances of your withdrawal. TSP withdrawal is a wide ranging topic, and we have a dedicated page for it. Read it here.
We also have a dedicated page for rolling over your TSP to a Gold IRA (thereby enabling you to include physical gold and other precious metals in your retirement fund). Read it here.
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