Disclaimer Notice: “Neither enduringfinances.com nor any of its partners or representatives is in any way affiliated with the United States Government, The Federal Retirement Thrift Investment Board or the Thrift Savings Plan, and that the service being offered is not sanctioned by the United States Government, the Federal Retirement Thrift Investment Board or the Thrift Savings Plan.“
A Thrift Savings Plan is a federal retirement plan. It is only available to federal government employees and military service members. It is a defined contribution plan meaning there is no fixed monthly benefit in retirement, you only have what you put in yourself for your retirement years. The retirement income will be based on how much money you saved and contributed while you were still working. Once you empty the tank so to speak, you won’t have any more money for retirement.
The good news its you automatically receive 1% of your salary contributed to your retirement account (by your employer) simply for being an employee! You do not have to contribute any of your own income to receive this 1% and that is amazing! As of October 2020, all newly hired or rehired federal employees are automatically enrolled in the Thrift Savings Plan contributing 5% of their annual income. This 5% contribution ensures that new federal employee and service members are getting the full match towards retirement.
TSP Employer Matching –
- First, you receive the 1% from your employer automatically (Yay!).
- Then, if you contribute 3% of your own salary, they will match that 3% – dollar for dollar.
- Lastly, if you add an additional 2% of your salary, they will match that 2% – 50 cents on the dollar.
So, say you make $15 and hour or $2,400 a month. The government agency will contribute 1% or $24 a month just because you are awesome. If you contribute 3% or $72, they will contribute another $72. Then to top it all off, if you contribute another 2% or $48, they will contribute another $24 to your retirement account. Rounding out to $264 total being added to your account but… you only had to contribute $144. The remaining $120 was a free gift from your employer towards your retirement!
| Your Contribution | Your Employers Contribution |
| $144 | $120 |
Free money is something you never want to miss out on! So, putting at least 5% of income towards retirement is the way to go! You can make changes to your contributions at any time so if no longer wish to contribute or want to contribute more you can easily do so.
The Thrift Savings Plan is broken down into 2 different types of funds, Lifecycle funds and Individual funds.
Individual Funds In A Thrift Savings Plan –
Individual Funds are broken down into 5 specific investments area based on mirroring different indexes and market segments from small companies to international investment funds. Each fund is focused on different investments so there is little overlap or diversification if you only choose to contribute to one.
G Fund focuses completely on Government backed securities and is guaranteed by the federally Government. Essentially there is no risk involved with this fund. The return rate is calculated as an average of more than 150 US Treasury Securities each month.
F Fund focuses on fixed income index investment funds similar to the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. This Fund follows the Bond Index and is only focused on high qualify securities with a low-medium risk assessment.
C Fund focuses on matching the S&P 500 Stock Index. The S&P 500 houses 500 of the largest companies that are publicly traded. It is also one of the most common indexes used to gauge the United States market overall. Matching the returns of the largest 500 stock companies is a great aim to achieve and sits with a medium risk assessment.
S Fund focuses on matching the Dow Jones Stock Index. While the C Fund focuses on larger companies, the S Fund focuses on small to medium sized companies. There are also a larger number of companies to invest in, but they are smaller with lower trading volumes and generally carry higher risk than large companies marking it a medium-high risk choice.
I Fund focuses on matching the EAFE Index. The EAFE index covers the performances of international companies trading in the European, Australian, and Asian stock markets. This fund offers the ability to diversify your investments outside of US Companies. The I Fund is categorized as a high risk investment.
Lifecycle Funds In A Thrift Savings Plan –
Lifecycle Funds are a mix of the 5 Individual Funds. Each Lifecycle fund focuses on diversification that is tailored to how close you are to retirement. Overall, the level of risk decreases the closer you get to retirement age. Naturally, the farther you are from retirement the more risks you can take when it comes to investing. And more risk usually means a higher reward. This is true with these plans, the fund L 2065 averages a 10.05% return and the fund L 2025 averages a 4.76% return.
The Lifecycle Funds are broken down into 5-year increments based on the year you will be eligible or plan to withdraw your retirement. Which makes life very easy for you as the funds are managed for you. After you select the fund that matches the year you plan on retiring, you don’t need to worry about a thing. You can sit back and watch your money grow over time. Once you transition into retirement and start withdrawing funds, you will automatically fall into the L Income Fund. The income fund is the most conservative fund and is focused primarily on preserving your money rather than growing your money.
Roth Vs Traditional Contributions With A Thrift Savings Plan –
Whichever route you chose to take, Lifecycle or Individual funds, you still have another decision to make. You have the option to invest using Roth contributions, Traditional Contributions, or a mixture of both.
By using Traditional contributions, you add more to your retirement upfront because you defer paying taxes right now and you also lower your taxable income overall. This means you can add more money right now and have more time for the money to grow. However, eventually you will have to pay taxes when you withdraw the money in retirement.
If you opt to use Roth contributions, you pay taxes right now. But when it comes time to withdraw your money, you will not have to pay taxes on the interest that you have earned over the years. Both options grant you taxes benefits which is amazing! It just depends on your personal situation to determine which route is right for you. I personally have invested with both Roth and Traditional Contributions.
Maximum Contribution Limits For A Thrift Savings Plan –
There are annual contribution limits to TSP retirement accounts. For 2021, the total amount is $19,500 for all Roth and traditional contributions. For those 50 years and older, there is an additional $6,500 catch-up limit to help your build up your retirement savings fast. If you can’t max-out your limits, make sure you are at least getting your employer matching to soak up all that free money!
Vesting Requirements For A Thrift Savings Plan –
To be completely vested, you must complete 2 years of federal service. If you leave before hitting those two years, you will lose the employer contributions to your retirement. Of course the funds you contributed yourself are yours to keep. Either way if you leave the federal service and have more than $200 in your TSP account, you can retain your account permanently if desired. You can also elect to transfer qualifying funds from other retirement accounts to your TSP account.
2020 Thrift Savings Plan Fee Break Down –
It is also important to remember that retirement accounts or other investment accounts will charge fees for their services. They are required to disclose what the fees are for and give accurate information. This is helpful for you when you are evaluating different accounts to work with.
Resources:
https://www.tsp.gov/tsp-basics/administrative-and-investment-expenses/
https://www.tsp.gov/funds-individual/
https://www.tsp.gov/funds-lifecycle/
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