The Thrift Savings Plan, or TSP, is the Federal government’s version of a 401(k) plan and if your goal is better understanding the TSP, we have written an overview of the plan . Is the TSP a 401k? Not exactly, but they share a number of similarities as follows:
- While the TSP isn’t technically a 401k, it is a defined contribution plan just like a 401k (and a 403b for that matter). Defined contribution means your employer – in this case, the Federal Government – will contribute a defined amount toward retirement for you subject to certain rules.
- The TSP offers both a traditional option and a Roth option, as do many 401k and 403b plans. Contributions to the traditional option are taxed deferred and reduce your taxable salary, but any future withdrawals are treated as taxable income. Roth option contributions are not tax deductible, but future withdrawals aren’t taxed. When it comes to the traditional TSP versus the Roth TSP, your specific financial situation will dictate which option is better for you. A recent article we wrote here can help you understand the plusses and minuses of Roth versus traditional contributions.
- Limits on TSP contributions are equivalent to those for 401(k) plans. For 2021, that amount is $19,500 plus an additional catch-up contribution of $6,500 for employees age 50 or older.
- Once you separate from the Federal Government and are no longer a Federal employee, your traditional and Roth balances can be rolled over into an IRA or a Roth IRA respectively.
- The Thrift Savings Plan has provisions covering both in-service distributions (i.e., withdrawals while you are still working) and a TSP loan option and you’ll find an overview of those provisions here. While we think it’s best to avoid taking funds from your retirement accounts, if you must do so, loans are a much more tax efficient way to draw from the TSP assuming the loan is repaid according to schedule.
- Due to IRS rules, both the TSP and 401k plans require you to begin withdrawing from the accounts once you reach the age of 72. However, you can avoid having to take a required minimum distribution, as these withdrawals are named, if you have not yet separated from service.
There are some differences between the TSP and many 401(k) plans. Those are as follows:
- Two criticisms of 401(k) plans in recent years are that the costs for many are difficult to determine, but in many instances they are higher than they should be. Retirement plan fees result from administrative fees as well as fees for the investment options. TSP account admin fees are relatively low and the investment options are broad based, low-cost index funds. As a result, overall the TSP is a low-cost plan.
- Many 401(k) plans offer a variety of investment options, and some even offer an “open platform” that includes thousands of funds. Your TSP options are limited when it comes to investments, so if you are looking to invest with a particular manager or fund family, or if you are pursuing a more esoteric strategy, you won’t be able to do so via the TSP investments. Perhaps the biggest issue with TSP investment options is the fact that you can’t invest in emerging markets, although that may change. You’ll find an overview of investment options along with suggestions for building a portfolio in this post.
- The Federal government provides a 1% automatic contribution to the TSP, and they’ll match up to an additional 4% of your salary if you make a 5% contribution. The total match of 5% is more generous than many 401(k) plans, and when you consider the FERS contributions that are made as well, retirement benefits compare very favorably to the private sector.
- Historically, with the TSP, once you reached retirement, you were only allowed one partial withdrawal. This was too restrictive for many retirees, and as a result, they opted to roll over their TSP to an IRA from which they could draw as they needed. Fortunately, as of September 15, 2019, the TSP offers greater flexibility when it comes to partial withdrawals. We’ve written a post on TSP withdrawal options, including the recently increased options for partial withdrawals, and you’ll find that post here.
Overall, the Thrift Savings Plan compares favorably to 401(k) plans, and if you work for the Federal government and can participate, it very likely makes sense to do so. It serves as a solid adjunct to the FERS pension, and the combination of the TSP and FERS can provide a solid foundation for retirement.
As a Federal Employee, Your Retirement Benefits Are Complex.
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