TSP in Retirement: What You Need to Know
The federal government provides a different method of retirement savings than private enterprises. The Thrift Savings Plan (TSP) is similar to popular private-sector plans. Still, it has some unique options that make it an attractive benefit for signing on to a government job. These unique options include making pre-tax contributions, receiving employer matches, and earning long-term growth potential in various funds.
Here is a closer look at TSPs work and what you need to know before joining one.
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What is a Thrift Savings Plan (TSP)?
For most employees who work for the federal government on a part-time or full-time basis and have an eligible pay status, a TSP is a retirement savings program. More specifically, TSPs are accessible to:
- Members of a uniformed service, whether on active duty or in the Ready Reserve, work for the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS).Civilians in some additional government service categories
Like 401(k) and 403(b) plans, TSPs let you invest part of your pay to save money for retirement. Most people automatically enroll in a TSP, with 5% of their salary going into an individual account. It is the minimum you have to contribute to get your employer’s match.
“Federal employees are automatically enrolled in the TSP,” junior partner and financial advisor Samuel Eberts say. “Even if they leave their work soon after starting, they will be allowed to keep any contributions, the majority of the government match (if available), and account growth.”The government matches the contributions of military employees in the blended retirement system (BRS) and FERS.”
Ask your boss if you are in a TSP if you aren’t sure. Most organizations enroll new hires and put 5% of their salary into a Lifecycle Fund (discussed below). Employees can change these allocations at any time.
Two TSPs may be available to you: traditional TSPs and Roth TSPs.
- A traditional TSP account uses pre-tax contributions from your salary. Your employer also matches these contributions. You do not pay taxes on the money you put in or generate until you withdraw it, which is when you retire.
- A Roth TSP is a type of account that contains post-tax contributions. It means that the money you contribute will not be taxed again when you withdraw it. You may be eligible to enroll in any TSP.
How does a TSP work?
A TSP is a retirement savings account that lets you invest part of your paycheck before taxes. Your employer may also put money into your account, making saving for retirement easier.
In 2022, you can contribute up to $27,000 to a traditional or Roth TSP account if you are younger than 50 years old. If you are older or turn 50 this year, you can make an additional $13,000 catch-up contributions.
You can transfer tax-deferred funds from different retirement accounts into a traditional TSP account. You can add money from other Roth accounts if you have a Roth TSP.
You can contribute up to $61,000 in additional money to your retirement account in 2022. It includes tax-deferred, after-tax, and tax-exempt employee contributions and matching and automatic 1% contributions from your agency or branch of service. This limit does not include catch-up contributions.
It would help if you waited until 59 ½ to take money out of your TSP account without penalty. There are a few exceptions, like if you can’t work because of a disability or die. You may be able to take the money out early if you have a financial emergency. Still, you will have to pay taxes and a 10% penalty on the amount taken out. You are required to take the money out of your account when you turn 72.
In a traditional TSP, you don’t have to pay taxes on the contributions or earnings until you take them out. It can be when you are 59 ½ years old or older. The distributions will be taxed as regular income. But if you choose to, you can put the money into another type of retirement account and delay your tax liability even longer. If you decide to put the money into a Roth IRA, you can now pay the income taxes on the distribution. Withdrawals from the Roth IRA will be tax-free.
Roth TSPs don’t make you pay taxes on your money. You also don’t have to pay taxes on the money when you take it out if it’s for a reason like being older than 59 and a half or more than five years since your first Roth contribution.
If you need money from your TSP but don’t want to take a distribution, you may be able to take out a loan. There are two types of loans available: general purpose and residential. With a general-purpose loan, you can use the money for any purpose. A residential loan is for buying, building, or repairing a home.
Molly Ford-Coates is the founder and CEO of Ford Financial Management. She is also a certified financial counselor and says there are two types of loans: general-purpose and residential. With a general-purpose loan, you can use the money for anything. The repayment term for this type of loan is between 1 and 5 years. A residential loan is for when you want to buy a house. The repayment term for this type of loan is between 1 and 15 years. You must repay all loans. It will be taxable income if you separate or retire before the loan is paid and do not repay it within 90 days.
If you want to get a TSP loan, you have to meet specific requirements. For example, the loan amount cannot be more than 50% of your vested balance or $50,000 minus your highest outstanding loan balance. Additionally, you will have to pay interest on the loan and an administrative fee of $50.
How are TSP funds invested?
TSPs provide participants with two investment options. The first option is lifestyle funds, a collection of ten funds that invest in equities, bonds, and government assets. This option is intended to make investing simple for those who have a long time until retirement or are unfamiliar with managing money. The second option is the Self-Managed Fund which lets you choose from over 1,000 different investments.
Shawn Plummer, CEO of The Annuity Expert, says that “lifecycle funds” are an excellent way to invest your money. Lifecycle funds are a mix of investments that change over time depending on how old you are. If you’re young, your assets will be more aggressive. Still, the investments will become more conservative as you get closer to retirement age.
If you want to choose how to invest your retirement money, TSPs offer individual funds. You can choose from five different funds, each with its approach and purpose.
“These funds are divided into asset classes. And you can decide which to invest and how much money to put into each one, “says Mainsail Financial Group co-founder and CEO Brandon Steele, CFP, ChFC. “If you choose this path, your allocation will not change on its own as you get closer to retirement. If you wanted to adapt as you got closer, you’d have to do it manually.”
Individual fund options include:
- Government Securities Investment Fund (G Fund): This low-risk fund safeguards your money while providing returns comparable to short-term Treasury securities. The government guarantees both your principal and interest payments.
- (F Fund) Fixed Income Index Investment Fund: This FundFund is low to medium risk. It follows the Bloomberg Barclays US Aggregate Bond Index performance. It means that when you invest in this FundFund, you invest in bonds. These bonds have different risks, like not getting your money back or not getting paid the interest you were expecting.
- Common Stock Index Funds (C Fund): This FundFund is medium-risk. It matches the performance of the S&P 500 Index. Your dollars in this FundFund are invested in securities offered by large and medium-sized companies. If you also invest in an F Fund, this will help offset your risk.
- S Fund (Small Cap Stock Index Investment Fund): This FundFund tracks the performance of the Dow Jones US Completion Total Stock Market Index. Securities in this FundFund come from small- to mid-sized US companies. It offers an opportunity to diversify stocks in conjunction with investments into the C and I Funds.
- International Stock Index Investment Fund (I FundFund): This is a risky fund that invests in non-US companies. The FundFund’s value rises and falls with the US dollar’s strength.
Pros and cons of TSP plans
There are numerous benefits to subscribing to a TSP, including the ability to establish a robust retirement fund through various diversified assets. As with every financial tool, there are some drawbacks to consider. Here are some of the benefits and disadvantages of TSP plans:
Can You Contribute to Your TSP After Retirement?
Service members and government employees can use the Thrift Savings Plan (TSP) as a retirement account to save money. The TSP is similar to a 401(k), which means that participants can contribute money to the account and receive matching contributions from the government.
To build your retirement savings, you must regularly contribute money to your TSP account. When you retire, the entire amount in your account will depend on how much you contributed and how much the account increased.
Using the TSP for Military Retirement
Before learning about what happens to your TSP when you retire from the military, it is essential to understand how your contributions work. Knowing this will answer many of the questions you may have.
Do I Automatically Receive a TSP Account?
Suppose you are part of the military’s Blended Retirement System. In that case, you will be automatically enrolled in a TSP account after 60 days of service. It is valid for all servicemembers who joined on or after January 1, 2018.
You could choose the Blended Retirement System if you joined the military after January 1, 2018. If you don’t select it, you need to contribute to your service to establish an account.
How Do TSP Contributions Work?
You’ll choose how much money is taken from each paycheck to put into your TSP account. It is also how you:
- Start your contributions if you were not automatically enrolled.
- Increase or decrease your contributions if you were automatically registered.
- Change your employee contribution amount or their tax treatment — traditional or Roth.
- Stop your contributions.
Once you enroll in the TSP, your employer will start contributing to your account. The percentage of money contributed from your paycheck was 3% if you joined between 2010 and September 2020. If you join after October 1, 2020, your contribution amount is automatically 5%.
Can I Continue to Contribute to My TSP After I Retire?
No, you cannot contribute to your TSP once you retire. The Thrift Savings Plan is for servicemembers who can only receive contributions from government paychecks. That means that if you retire, you will not be able to contribute any more money to your account. However, that does not mean your TSP account cannot continue to grow.
After retirement, the owner of a TSP account can transfer retirement assets from other existing accounts into the account. It is different than making contributions. Once you transfer the retirement assets, you will benefit from paying the TSP’s meager management fees.
TSP Cost vs. Other Retirement Accounts
The majority of TSP accounts only charge $0.38 per every $1,000 invested, which is much less than other retirement options.
Retirement accounts outside of a TSP can range in price. Some are much more affordable, charging between $2 to $7.50 per $1,000 invested. More expensive accounts can charge between $10 to $25 per $1,000.
The cost of a retirement account is an essential factor to consider. But it would help if you also thought about how easy it will be to use the account. If you leave the military, you might work a few jobs in the private sector before you stop working altogether. Each job will likely offer a benefits package. You may collect 401(k)s or other retirement accounts. Keeping track of all these accounts can be difficult, but a TSP account is simple and convenient.
The TSP is a good choice for saving for your future. It is like a 401(k) or 403(b). You can control your investments. It makes it familiar for people who have worked in the private sector.
Because many agencies enroll new hires in a TSP, knowing if you are participating is essential. If you are, it is always a good idea to talk to your plan administrator. Understand the different investment options available so you can make informed choices about your future.
You might want to speak with an independent financial advisor. They can help you figure out how much money to defer into your TSP account. They can also advise you on the best way to save for your goals- traditional, Roth, or a mix of the two. Finally, they can explain the long-term and short-term benefits of participating in a TSP.
Frequently Asked Questions About TSP in Retirement
If your vested account balance is $200 or more when you leave federal service, your TSP account stays right where it is until you need it. You can keep more of what you save because our costs are low. Plus, you can change your investment mix and transfer eligible money into your account.
The average account balance for Uniformed Service Members reached almost $30,000 by the end of 2019. In just two years since the BRS became operational, the average balance for new ‘Blended Retirement System’ (BRS) participants reached close to $7,000.
Many federal employees and spouses must pay their Social Security income taxes. You must pay taxes for every dollar you take from your TSP account. You will also have to pay taxes on your Social Security income, even if you wouldn’t have had to do so before.
The TSP is a tax-deferred account. That means you don’t have to pay taxes on the money you earn in your account until you withdraw it. It makes the TSP more affordable than other retirement accounts. Plus, the fees for the TSP are lower than most other investment accounts. It means more of your money will work for you when you retire.
Participants may roll over their eligible rollover distributions from their TSP accounts to a qualified trust or an eligible employer plan. An eligible employer plan can be either an IRA or another.
TSP (Thrift Savings Plan) is a retirement saving and investment plan that offers Federal employees the same benefits many private corporations offer through 401(k) plans. Employees can save for retirement and have their contributions deducted from their paychecks before taxes are taken out, which can help them save on their taxes.