One of the benefits the government offers their employees is a Thrift Savings Plan (TSP). This is a retirement savings and investment plan for military personnel and Federal employees, and it was established by Congress in 1986. The TSP offers the same types of savings and tax benefits that many private corporations offer their employees under their 401(k) plans. Because a TSP is considered a contribution plan, the income you receive from your TSP account will depend on how much you put into your account throughout your working years (keep in mind your earnings will accumulate over time).
Difference Between TSP & 401(k)
Many 401(k) plans have fees attached to them. Fortunately, a TSP has some of the lowest cost investments available for employees. These low costs help the participants build their wealth faster. Compounding interest is a powerful tool when saving for retirement. Because TSP’s investing fees are so low, it helps with building compound interest.
Thrift Savings Plan Details
The TSP falls under a contribution plan, which means each participant in TSP has their own individual account. The individual decides how much they want to invest in their account, along with the matching contributions of their employer/company. There are other factors that determine the value of the account, for example the expenses and fees. Military personnel normally do not qualify for matching funds, but civilian government employees are eligible to receive matching funds up to 5%.
Another option is the tax deferred retirement plan. This plan invests money from your paycheck before any taxes have been taken out. This money will then grow in an investment plan without the taxes being affected by the value of the funds. Taxes will be assessed on the funds when they are taken out as retirement distributions during retirement.
Who Qualifies For A TSP?
Most government employees qualify for enrolling in a TSP (excluding government contractors). Below, (but may not be limited to) are the general categories for eligible employees:
- A member of the uniformed services including members of the Reserves.
- A Civil Service Retirement System employee hired before January 1, 1984 who did not convert to FERS.
- A Federal Employees’ Retirement System employee hired on or after January 1, 1984.
- A civilian “in certain other categories of Government service,” according to TSP. gov.
**Employees must be part time or full time in government service to be eligible to enroll.
Enrolling In A TSP
When an employee enrolls in their Thrift Savings Plan, they will learn about different investment plan options, complete contribution allocation paperwork, and set up an “interfund transfer.” This is for naming a beneficiary for their funds in the circumstance of death or if they become incapacitated.
Automatic TSP Enrollment for New Employees
Federal employees that were hired after July 31, 2010 and are part of the Federal Employees’ Retirement System (also known as FERS) will automatically be enrolled in a TSP plan with an automatic contribution of 3% of their basic pay. This will automatically be taken from the employee’s paycheck each pay period and be directly deposited into their Thrift Savings Plan. This is in addition to the Agency Automatic Contributions of 1% of total base pay, qualifying employees for Agency Matching Contributions.
Although this is automatic for new employees, they have the option of opting out of the plan when they are hired. TSP members have the option to start, stop or change contributions at any time by using their agency’s or service’s electronic system. This can also be done by completing the form TSP-1 (civilian TSP) or TSP-U-1 (military personnel).
Civilian employees that fall under FERS also have the option to earn or make additional TSP contributions from their base pay to receive Agency Matching Contributions. Civilian TSP members that contribute at least 5% of their basic pay to their TSP account can receive the full amount of agency matching contributions.
Automatic TSP Enrollment Benefits Employees
Companies have learned that an automatic enrollment for their employees has increased in retirement plan participation. This has been a successful tool for companies to incorporate for their employees because automatic contributions make it easy to start saving money and preparing for the future.
Employers know and understand that retirement plans benefit their employees. Although people agree that retirement plans are a great idea, many employees fail to take the time to sign up for benefits.
- Low Fees – Expenses are very low on the account (about 1/10th the average of a private mutual fund). For example, the TSP C fund which tracks the S & P 500 consistently has one of the very lowest expense ratios compared to the other funds. Ultimately, this means more money goes to the service members.
- Pre-Tax Contributions – TSP contributions are made before taxes are calculated.
- Automatic Payroll Deductions
- Loan Programs – General purpose and first-time home buyer loans are allowed.
- After Service Withdrawal – While service members can no longer contribute, they can leave their money in the TSP and continue to earn returns on it.
- Matching Contributions – Each branch of service may contribute matching contributions based on certain stipulations.
Pay that is Excluded from TSP
TSP contributions can only be made from your Basic Pay. Listed below are different types of pay that are not considered Basic Pay:
- Foreign and Domestic Post Differential for General Schedule Employees
- Foreign Post Differential for Prevailing Rate Employees
- Severance Pay
- Retroactive Pay Granted to a Retired or Deceased Employee Pursuant to a Wage Survey
- Lump-sum Leave Payments
- Voluntary Separation Incentive Payments
- Office of Workers’ Compensation Programs Payments
The information in this article is only a fraction of the info in regards to having a TSP. The government offers a useful tool for employees to better prepare for their future. It’s beneficial for employees to take full advantage of this opportunity.