Government retirement basics: Thrift Savings Plan
Here are the details you should know about one of the key tools of government retirement planning
- Plans are designed to help an employee’s nest egg grow
- They encourage employee investment
- They are tax-deferred
If you work in the military, your vehicle for retirement savings isn’t likely to be the same as everyone else’s. While standard businesses often focus on offering a 401K plan and nonprofits set up 503b plans, a government-sponsored savings vehicle is called a Thrift Savings Plan, TSP for short. TSPs have the same general function as other plans but operate differently in terms of specifics. How differently? We’ve got the details.
Contributions are automatic, matched by the government
The first thing to consider with any retirement program is how its contributions will be handled. With a TSP, contributions happen in such a way that employees are encouraged to save as much as they possibly can. This starts as soon as employees receive their first paycheck when their contribution is made automatically at a minimal rate. Employees who wish to can elect a higher amount.
Whatever an employee adds to the plan, up to the first 5% of their contribution will be matched. The amount is vested, and employees gain access to it over time. This is one of the best points of the program because, ultimately, the government match is essentially free money, over and above any salary they receive.
TSP funds allow for other growth opportunities, as well. As soon as it is deposited, this money joins the amount that is contributed to the employee’s nest egg, and both amounts, together, earn interest from investments. The interest then grows the principal amount, and both, together, earn even more interest through compounded gains. This effect ultimately increases an employee’s savings program faster.
Plan contribution limits
Like retirement plans for other types of employers, there are limits to how much participants can contribute. These contributions rest at a certain place for most employees and then rise sharply once the employee reaches age 50. There are also differences in contribution limits for deployed service workers and some civilians who are serving in combat zones. These individuals can contribute as much as $53,000 in a single year.
The plan allows participants flexibility
TSPs give users lots of choices. As they set up the plan, they can choose between traditional options that don’t tax you until you take a distribution, and Roth-structured plans that tax your earnings before you contribute them. With a Roth plan, because you have taken taxes out at the beginning of the process, you never have to pay taxes again, no matter how large the amount invested in the plan grows.
TSPs give users lots of choices.
In 2019, the TSP had five fund options available to participants, and each of these options was designed to remain as simple as possible. Users were able to invest within conservative, moderate risk, and higher risk funds, most choosing based on their risk tolerance and how long they have left to retire.
Questions? Talk to a qualified investment professional
As with any other concern about retirement, if you’re not sure about some of the decisions you have to make, seek out expert advice.
These options can be confusing. If you have questions, you should speak with a qualified investment professional or financial planner. They’ll know how the details of your TSP fit into your overall planning efforts and can strategize with you about how all your retirement options can work together to meet your goals
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