Federal employees don’t have access to the same kind of workplace retirement accounts as those in the private sector. If you recently joined the U.S. government workforce as a civilian or you’re a member of the military, that means your retirement investing goes through a different account called the Thrift Savings Plan (TSP).
The TSP is a government-sponsored retirement plan offered to federal employees, similar to a 401(k) that is generally offered through private companies. Think of it like a 401(k) for your federal government job.
How does a TSP work?
You are eligible to participate in a TSP if you are:
- A federal employee covered by the Federal Employees Retirement System (FERS).
- A federal employee covered by the Civil Service Retirement System (CSRS).
- A member of the uniformed services.
- A civilian in certain other categories of federal service such as some congressional positions, as well as some justices and judges.
Federal employees are automatically enrolled in the TSP with a 5 percent salary contribution. As part of the TSP, you are eligible to receive matching contributions from your agency or service, similar to how employers match 401(k) contributions. The 5 percent automatic contribution can be changed or reduced, but keep in mind that only those who elect to contribute at least 5 percent are eligible for a matching contribution.
New employees should be on the lookout for their TSP account number, online password and ThriftLine PIN, all of which arrive in the mail. ThriftLine is the automated response system for the TSP. From there, your online profile can be created, and you can begin making investment selections.
How much can you contribute to the TSP?
The IRS has set the TSP elective deferral limit for 2022 at $20,500. The catch-up contribution limit, which is the maximum amount of additional money an employee can contribute over the $20,500 maximum, is $6,500 for participants turning age 50 or older in 2022.
Traditional TSP vs. Roth TSP
Similar to a 401(k) and IRA, there are traditional contribution options and Roth contribution options. With traditional contributions, the money you contribute is pre-tax, grows tax-deferred and is taxed on the back end once you begin to withdraw. Roth contributions are taken out of your paycheck after it’s been taxed, meaning the taxes are paid on the front end, grow tax-deferred and are distributed tax-free once you begin qualified withdrawals. The catch is, you must be at least age 59½ and five years have had to pass since Jan. 1 of the calendar year when you made your first Roth TSP contribution to begin qualified withdrawals.
Contributions are allowed for uniformed services members while earning tax-exempt combat pay. Contributions designated as traditional contributions aren’t taxed, but earnings will be taxed when withdrawn. If the contributions are designated as Roth contributions, they will be tax-free at withdrawal (if qualifications are met).
Types of investments available in the TSP
There are two major types of investments you can make in the TSP plan. The first, called L Funds or Life Funds, is similar to target-date funds found in 401(k)s. The second is an option for five individual investment funds, each with their own varying degree of risk and investment allocation.
L Funds, or Life Funds, are similar to target-date funds in that they operate under the assumption participants won’t need their money for quite a long time. The funds automatically adjust to reflect risk reductions based on age and expectancy of account withdrawals, which means the younger you are, the riskier the investment allocation could be and the older you get, the fund moves into safer positions or cash so that your money is available for retirement. If you’re near retirement, the L Income Fund is recommended, as it’s designed to protect your assets for example.
Each L Fund is a mix of the five individual TSP investment funds, weighted according to risk and time horizon.
Individual TSP funds
The TSP offers five different investment funds participants can choose from if they do not choose the L Fund option. Each fund has its own risk level and is concentrated in different assets. The funds are as follows:
- The Government Securities Investment (G) Fund: The G Fund is invested in short-term U.S. Treasury securities. It gives you the opportunity to earn rates of interest similar to those of long-term government securities with no risk of loss of principal. As always with government securities, their payment is backed by the full faith and credit of the U.S. government.
- The Fixed Income Index Investment (F) Fund: F Fund investments are managed to track the Bloomberg Barclays U.S. Aggregate Bond Index, so investments are in U.S. government, mortgage-backed, corporate, and foreign government bonds. This fund is considered higher risk than the G Fund but comes with a low-to-moderate risk profile.
- The Common Stock Index Investment (C) Fund: C Fund assets track the S&P 500 stock index, which means there is a moderate risk level associated with a higher potential rate of return.
- The Small Capitalization Stock Index Investment (S) Fund: S Fund assets track the Dow Jones U.S. Completion Total Stock Market Index. This fund includes both small- and mid-cap stocks, which means the risk level is higher than that of the C Fund.
- The International Stock Index Investment (I) Fund: The I Fund invests in an index that tracks the MSCI EAFE Index, exposing it to a broad range of international stocks. It primarily consists of large companies in more than 20 developed countries and gives global equity exposure to your account.
One important distinction to note: TSP funds are trust funds that are regulated by the Office of the Comptroller of the Currency — not by the Securities and Exchange Commission, as all other publicly listed equities are. As such, they don’t have tickers that can be easily searched. What investors can do, however, is track the corresponding indexes to their TSP fund of choice to see performance.
TSP vs. 401(k)
The TSP was modeled after the 401(k) plan, but there are significant differences. Though tax treatments, limits and contribution schemes are similar, the range of investment options are quite different.
401(k) plans are offered by private companies that can offer essentially any mix of investments they like, providing a wide variety of possibilities in terms of what can be made available to individual investors. They are only limited by their employer’s plan selections.
A TSP plan is a great way for federal employees to become involved in investing for their retirement. Though the investment options and servicing rules are different from a traditional 401(k), the goals of both are largely the same.
It’s important to remember that the individual investment funds in a TSP plan are what is invested in their L Funds, so if you are investing in a mix of both, you run the risk of overlapping your investments.