Do you know that the thrift savings plan is the world’s biggest retirement plan? Let’s explore this popular retirement plan in greater detail.
What is Thrift Savings Plan (TSP)?
For those working for the federal government, there is a retirement saving and investing account called the Thrift Savings Plan, also known as TSP. It provides government employees with features and advantages that are comparable to those of a 401(k) plan used in the private sector.
The significant features of the TSP retirement plan include matching contributions by the employee, tax advantage, and automatic deductions from payroll for contributions. Federal employees can direct a portion of their monthly income toward long-term savings through the tax-preferred federal thrift savings plan.
Who is Eligible for TSP?
The three most frequent methods to qualify for the TSP are to work for the Federal Employees Retirement System, the Civil Service Retirement System, or to be a member of one of the U.S. armed services, such as the Army or Marine Corps.
What Will the TSP Contribution Caps Be in 2023?
For 2023, the maximum TSP contribution for federal employees and active-duty service members is $22,500. This represents a $2,000 increase from 2022. Your plan might let you make an extra $7,500 “catch-up” contribution if you’re 50 or older. Therefore, you are able to make a total contribution of $30,000 In 2023.
Active military personnel deployed to combat areas and receiving tax-free income are eligible to make contributions up to $66,000. From 2022, this has grown by $5,000.
What Sets Traditional TSP Contributions Apart from Roth TSP Contributions?
The standard TSP contribution and the Roth TSP contribution have many distinctions. Let’s understand through this table in a better way:-
| Criteria | Traditional | Roth |
|---|---|---|
| Contributions | Pretax | After-tax |
| Take-home Pay | Less money is taken out of your paycheck as taxes are deferred. | More money comes out of your paycheck as taxes are paid up front. |
| Transfers In | Transfers from regular IRAs and qualifying workplace plans are permitted. | Transfers are permitted from accounts that are Roth 401(k), Roth 403(b), and Roth 457(b). |
| Transfers Out | After separation, transfers are permitted to regular IRAs and Roth IRAs as well as to qualifying employment plans. | After separation, transfers are permitted to Roth 401(k), Roth 403(b), Roth 457(b), and Roth IRA accounts. |
| Withdrawals After Separation | It is taxable when withdrawn. If you are younger than 59½ and certain requirements are not met, a 10% penalty could also be imposed. | When withdrawn, contributions are tax-free. If you are permanently disabled, have passed away, are older than 59½, and it has been five years since you made your first Roth investment, you can withdraw your earnings tax-free. If you are younger than 59½ and certain requirements are not met, a 10% penalty could also be imposed. |
What Options are There for Investing in TSP?
Following are the 6 popular TSP investment options, each invests in various assets and has its own level of risk.
1. Specific lifecycle (L) funds
Target-date funds and L Funds are also known as life funds. They both operate on the premise that investors won’t need their money for a while. The funds automatically change to reflect risk reductions based on age and the anticipated number of withdrawals from the account. Thus, the L income fund is advised if you’re close to retiring.
2. The Government Securities Investment (G) Fund
The G Fund invests in U.S. Treasury securities with a short maturity. You have a low-risk chance to earn interest rates that are comparable to those on long-term government securities. Their payment is guaranteed by the U.S. government’s full faith and credit, as is the case with all government securities.
3. The Fixed Income Index Investment (F) Fund
The F Fund invests in U.S. government, mortgage-backed, corporate, and foreign government bonds because it is managed to follow the Bloomberg Barclays U.S. Aggregate Bond Index. Although it has a lower to moderate risk profile than the G Fund, this fund is regarded as having a higher level of risk.
4. The International Stock Index Investment (I) Fund
The I Fund invests in an index that closely mirrors the MSCI EAFE Index, exposing it to a wide variety of foreign stocks. As a result, it exposes your account to global equity markets and is generally composed of significant corporations in more than 20 industrialized nations.
5. The Small Cap Stock Index Investment (S) Fund
The Dow Jones U.S. Completion Total Stock Market Index is tracked by the S Fund assets. This fund has a higher risk threshold than the C Fund because it invests in both small- and mid-cap stocks.
6. The Common Stock Index Investment (C) Fund
This medium-risk fund replicates the S&P 500 Index’s performance. Your money is invested in securities provided by large and medium-sized businesses through this fund. If you also invest in an F Fund, investing in this type of fund can assist in reducing risk.
Call us now at (866) 639-0066 to gain chequebook control over your funds.
FAQs
Is TSP the same as 401(k)?
Although tax laws, restrictions, and contribution plans are identical, TSP and 401(k) investing alternatives are considerably different (K).
Does a TSP outperform an IRA?
Both TSP and IRA provide excellent tax benefits for retirement savings. To decide which plan is perfect for you, consider your individual circumstances. Keep in mind that you might be able to save a little in each to benefit from both.
If I leave my job, what happens to my Thrift Savings Plan?
The TSP fund permits you to take your funds with you when you decide to leave your employment.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
