Thrift Savings Plans, also known by the acronym TSP, were created as part of the Federal Employees’ Retirement System Act of 1986 to give federal employees and military personnel retirement savings options similar to those available to employees of private companies. Thrift Savings Plans are very similar to 401ks and other types of retirement funds, and individuals are able to invest in a variety of different funds, many of which resemble private index funds. Government agency employers may also contribute or match contributions to a Thrift Savings Plan fund as an employee benefit.
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How Does a Thrift Savings Plan Work?
Funds for Thrift Savings Plans are held by the Federal Retirement Thrift Investment Board, (FRTIB). The FRTIB is an independent government agency whose five board members and executive director are appointed by the President. These officials are in charge of managing Thrift Savings Plans for the benefit of government employees and service members. Like other types of retirement plans, such as 401ks and IRAs, Thrift Savings Plans invest retirement contributions in the stock market in order to help them grow over time. There are a variety of different investment funds to choose from, many of which mirror common index funds available to 401ks and IRAs.
Traditional vs. Roth TSP
There are two types of Thrift Savings Plans available: Traditional Thrift Savings Plans and Roth Thrift Savings Plans. The differences between these two plans mirror to a large extent the difference between a Roth account and a Traditional 401k. In a Traditional Thrift Savings Plan, the money is invested in the plan before taxes are taken out. This enables employees to potentially contribute a greater sum than they would otherwise be able to, since they haven’t had to pay taxes on the money they contribute. The contributions are taxed when money from the fund is withdrawn during retirement.
In contrast, money contributed to a Roth Thrift Savings Plan is already taxed. While this might mean that you’re able to make slightly smaller initial contributions, the benefit is that the money won’t be taxed when it is withdrawn during retirement. Essentially, when contributing to a Roth Thrift Savings Plan, you pay the tax upfront, while when contributing to a Traditional Thrift Savings Plan, you pay tax when you withdraw money during retirement. Investing in a Roth Thrift Savings Plan can be beneficial if you think you’ll have a higher income bracket and be taxed at a higher rate during retirement. Investing in a Traditional Thrift Savings Plan makes more sense if you think your current income and tax bracket will be greater than it is in retirement.
Types of TSP funds
There are six types of Thrift Savings Plan funds that government employees and service members are able to invest in.
- L Funds: L Funds are Lifecycle Funds, used to invest in a mix of stocks, bonds, and government securities. L Funds are dependent on your age and retirement date, in order to get you the best possible return on your investment. The L Fund strategy, in fact, is to invest in a mix of the G, F, C, S, and I Funds at the proper times.
- G Fund: The G Fund, or Government Security Investment Fund, is used to invest your retirement savings in short-term US Treasury securities. There is generally no risk of loss of principal.
- F Fund: The F Fund, or Fixed Income Index Investment Fund, tracks the Bloomberg Barclays US Aggregate Bond Index and focuses on investment in the US bond market.
- C Fund: The C Fund, or Common Stock Index Investment Fund, is similar to the S&P 500, which tracks medium and large-sized business stocks in the United States. The C Fund often yields higher investment returns.
- S Fund: The S Fund, or Small Capitalization Stock Index Investment Fund, tracks the Dow Jones stock market index. This fund is used to invest in a mixture of small and medium-sized business stocks, usually ones that aren’t included in the C Fund. The S Fund may be associated with greater volatility because of the emphasis on smaller business stocks.
- I Fund: The I Fund, or International Stock Investment Fund, tracks the MSCI EAFE index, which represents the stock markets of Europe, Australia, and the Far East, and includes large business stocks from over twenty countries. The I Fund allows you to invest in the global market, rather than investing in only the United States stock market.
Depending on your employer, which funds you invest in, and your individual circumstances, the perks of each Thrift Savings Plan may vary. However, there are a few benefits across the board that come with investing in retirement through the Thrift Savings Plan:
- Employer Contribution Matches: Many government employees and service members are eligible for matching employer contributions when they contribute to a Thrift Savings Plans. While these additional contributions usually have an annual cap, they can help your retirement fund to grow significantly over the course of time, and are essentially “free” money that you can withdraw during retirement.
- Benefits of Investment: A Thrift Savings Plan is much more than an ordinary savings account, since it allows you to invest your retirement funds in order to grow them over time. Over the course of decades, this investment will compound, leaving you with more money in retirement.
- Lots of Options: You can choose between a Traditional Thrift Savings Plan or a Roth Thrift Savings Plan, and invest in a variety of different funds according to your needs and preferences, including both medium and low-risk investments. This gives you the flexibility necessary to make your retirement funds work best for you.
- Low Administrative Costs: Unlike some private retirement options, Thrift Savings Plans come with low administrative costs, ensuring that your retirement savings are invested appropriately and effectively.
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