Understanding Your Thrift Savings Plan (TSP)

Understanding Your Thrift Savings Plan (TSP)

What’s the TSP?

The Thrift Savings Plan (TSP) is a tax-deferred retirement savings vehicle designed specifically for federal employees and uniformed service members. This defined contribution plan was first established by Congress in 1986 and behaves similarly to private sector 401(k) plans. The plan allows federal employees to save a portion of their salary each pay-period for retirement. It is one leg, of the 3-Legged stool of retirement for FERS employees (FERS Pension and Social Security being the other two).

How Do TSP Contributions Work?

TSP contributions are taken directly from your paycheck. If you recently started working, you were automatically enrolled at 5% salary contributions to the TSP. You can work with your agency’s payroll to start, change or stop TSP contributions at any time.

Federal employees who contribute to the TSP receive matching contributions from their respective agency. The current matching percentages include the first 3% of contributions matched dollar for dollar and the next 2% matched at 50 cents per dollar. Contributions above 5% are not matched.

For 2021, the maximum contribution amount is $19,500 annually, or $26,000 annually if over age 50.

TSP contributions can be made with Traditional or pre-tax dollars (meaning you’ll defer the taxes now and pay the tax when you withdraw the money) or Roth/post-tax dollars (meaning you’ll pay the taxes now and receive qualified distributions tax-free in retirement).

What Are The TSP Funds Available to Me?

We’ll give a high-level overview of each of the funds available for your investment, and you can find additional information directly on TSP’s website.

What are your TSP Options in Retirement?

You’ll have four options when you’re ready to retire.

1. Cash Out
2. Annuitize Your TSP with MetLife
3. Leave the Money in TSP
4. Rollover to an IRA

There are pros and cons to each of these, and we’ll discuss these further below…

1. Cash Out

Pros: You can cash out your TSP and take all the money into your bank account. The money becomes yours to spend and do whatever you’d like. You can pay off your house, car loan, etc.

Cons: However, when you cash out your TSP, it’ll most likely bump you into a higher tax bracket. This is especially true if you have a larger TSP balance. Beware of the huge tax bill (potentially 30-40%) coming your way if you decide to go this route.

2. Annuitize Your TSP with MetLife

Pros: By annuitizing your TSP, you’re basically trading your account balance to receive a regular monthly income. This is similar to your FERS pension or Social Security. The amount you’ll receive depends on your TSP account balance. Ultimately, you’re purchasing an income annuity from MetLife. What’s great about this method is you’ll receive an additional paycheck for life.

Cons: If you want a guaranteed monthly paycheck, there may be better options in the outside marketplace, with higher monthly income amounts. Also, with other external annuities, you don’t have to give up your entire TSP balance. You can still continue to earn interest and grow your account balance. And, if you need additional money or income in certain months, you can do this in the form of a withdrawal.

3. Leave the Money in TSP

Pros: You can leave the money in TSP when you retire; there’s nothing that forces you to withdraw the funds. It can continue to grow in value over time in any of the available TSP funds. TSP fund selections also have extremely low fees.

Cons: However, there are no guarantees inside of the TSP and many of the investment choices come with market risk and the potential for loss of principal. Also, TSP is a great accumulation account, but not the most optimal distribution account when you want to make withdrawals.

4. Rollover to an IRA

Pros: By rolling your TSP over to an IRA, you can maintain full control of your account value and all investment choices. Your account value can continue to grow with interest, inside of a tax-deferred wrapper. Also, if anything should anything happen to you, the full account value will be passed along to your beneficiaries. GPIS can help with the rollover process if you’d like to learn more.

Cons: Beware, though, as some IRA options where you move your money can have high fees (3-5%!). Aim for IRA plans that have minimal fees, or none at all.

Schedule your FREE federal benefits review and retirement analysis here.

For more information, you can contact your friends at GPIS by calling 866-201-7829 or by sending an e-mail to info@gpis4u.org

-Sam Wiss, Retirement Income Certified Professional (RICP ®)