Thrift Savings Plan: The Third Piece in the Retirement Benefits Puzzle - United Benefits

Your Thrift Savings Plan (TSP) will generally be used as a third source of income after Social Security and your pension. The TSP has the most variables and can be set up in a wide variety of ways. Similar to a 401k plan, your TSP is truly the only part of your retirement that you have complete control of.

FERS, CSRS, and Social Security have defined benefit plans where your benefit is pre-determined by a formula. The TSP is different – it’s a defined contribution plan, where the only requirement is in regards to how money is put into it. Income from your TSP could either be traditional income (taxable) or Roth income (nontaxable) depending on how you’ve set it up.

Since this is the part of your retirement income that you have the most control over, you may have several questions regarding your TSP. Let’s dive in.

What is the Thrift Savings Plan (TSP)?

The Thrift Savings Plan was established by Congress in 1986. It’s a defined contribution plan, and it’s specific to federal employees. You can’t get it anywhere else. It’s a taxed-deferred retirement savings plan, and it’s very similar to a 401k plan in the private industry or corporate world.

As far as an accumulation vehicle, the Thrift Savings Plan is one of the best places to accumulate wealth if you’ll take advantage of what’s there. Since it’s entirely determined by what you contribute, it is what you make of it.

What are some advantages of the Thrift Savings Plan?

  • FERS/Agency Matching
  • Tax-deferred growth
  • Automatic payroll deduction
  • Traditional TSP
  • Roth TSP
  • The costs and the fees with TSP are minimal

How does Thrift Savings Plan Matching work?

Matching is your most significant advantage with the TSP. If you put in 0% of your paycheck as a FERS employee, the agency automatically puts in an additional 1% already. So you have a total of 1% of your income going into your TSP, no matter what.

The agency matches 100% up to 3% of your paycheck that you contribute (plus that extra automatic 1%). If you decide to contribute 4 or 5% of your paycheck, the agency will match 50% of those contributions. So the bottom line is, if you contribute 5%, then the agency matches 5%, and so you have 10% of your income going into your Thrift Savings Plan.

One of the number-one pitfalls that federal employees fall into is not taking advantage of the matching program. If you began federal service between August 1, 2010, and September 30, 2020, you were automatically enrolled at 3%. If you were hired on or after October 1, 2020, you were automatically enrolled at 5% which starts you off at taking full advantage of the agency’s matching. These are wonderful changes that have been made because anyone hired prior to August 1, 2010, were not set up on automatic contributions which led to some employees missing out on not only contributing to TSP but also never taking advantage of the “free money” that the agency matches.

How much can I contribute to my Thrift Savings Plan?

The IRS determines contribution limits. As of 2020, you can contribute up to $19,500. If you’re older than 50, there’s a catch-up provision where you can give another $6,500: so if you’re older than fifty, you can contribute up to $26,000. (Remember, that’s your contributions, not the matching.)

You can decide to contribute a dollar amount or a percentage of your paycheck. The benefit of contributing a percentage of your pay is that since the percentage stays consistent, the amount of money contributed grows automatically if your paycheck grows. You won’t have to remember to update your contributions (a nuisance, especially if you’re trying to maximize the matching).

Employees who set a hard dollar amount based on their 5% contribution at the time may miss out on more TSP savings by forgetting to update the dollar amount as their income changes.

What’s the difference between a Traditional and Roth Thrift Savings Plan?

In May of 2012, the Roth TSP was introduced as a new option. It’s important to know that the agency’s matching is always added to the Traditional side of your Thrift Savings Plan, regardless of whether you are contributing to the Roth or the Traditional. Is one better than the other? Let’s go over the differences between the two.

The Traditional Thrift Savings Plan: Growth is Tax-Deferred

The TSP Traditional option is a pre-tax option, meaning it lowers your current taxable income. The contributions on the Traditional side also grow tax-deferred, which means you don’t have to pay taxes on the interest as your account accumulates growth. Because the contributions on the Traditional side are pre-tax, and the interest is tax-deferred, ultimately, all withdrawals are taxed.

The Roth Thrift Savings Plan: Growth is Tax-Free

You must actively select this option upon selecting your contribution elections. All employees, regardless of their modified adjusted gross income, are eligible for the Roth TSP option.

ROTH contributions are taxed up-front, but this allows you to participate in tax-free growth and to receive qualified distributions tax-free. For the withdrawal to be a qualified distribution, you must have had the ROTH account for at least five years, and you must be age 59 ½ or older.

Is the Traditional or the Roth Thrift Savings Plan better?

A lot of employees ask us, “Should I do the Traditional, or should I do the Roth?” Well, there’s no easy answer. It depends on the individual. Do you believe you will benefit more from tax savings today while working, or later in retirement? It all comes down to choosing between tax benefits now versus tax benefits laterSo which strategy is right for you? No one can predict the future or how tax rates may change over time, so there is no right or wrong method for allocating your funds between the two. You will want to take into account:

  • Your Age
  • How Many Years Until Withdrawals Begin
  • Your Current Tax Rate
  • Your Expected Tax Rate in Retirement

What investment options are available through TSP funds?

TSP offers several different investment choices for you. Your first stop should be to visit They have great information about each fund, with different charts and historical content that you can read to get in-depth information. Here is a basic overview of the TSP funds.

The G Fund

The G Fund is a U.S. Treasury Security guaranteed by the U.S. Government. It is a fixed fund, which means it will not lose money. The rest of the funds are all variable funds. That means they can lose money based on the market. G is the only fund inside TSP that cannot post a negative return.

The F Fund

The F Fund tracks the U.S. bond market. Considered low to moderate volatility, the F Fund still has risk mainly in the form of interest rate and bond price risk. There’s a lot of things that come into play on the bonds, but the F Fund is historically more stable than the C, S, and I funds.

The C Fund

The C Fund is indexed to the S&P 500. The index is designed to match the performance of the S&P 500. The S&P contains stocks of 500 of the largest companies in the United States.

The S Fund

The S Fund indexed to the DOW Jones U.S. Completion index, which is a broad market index that includes small to medium U.S. Companies not included in the S&P 500.

The I Fund

The I Fund is an international stock fund. The I Fund is invested in the Morgan Stanley Capital Investment EAFE, which tracks companies in more than 20 developed countries across Europe, Australasia, and the Far East.

The L Funds

Lastly, in 2005, the government created the Lifecycle Funds or L Funds. The L Funds can be confusing because they’re a blend of the five other funds: the G, the F, the C, the S and the I Fund.

You can choose the L Fund that makes sense for yourself– and what you’re choosing is essentially a diversified portfolio based on a specific time horizon. The L Funds are named for the year you’d like to retire, such as the L 2025, L 2030, L2035, L 2040, L2045, L 2050, L2055, L2060, and L2065.

Fees for Each Fund

TSP investment fees can be as low as .04% – that’s only 40¢ per $1,000 invested, the low cost can help your nest egg grow more quickly.

What parts of my Thrift Savings Plan can I control?

Determining the arrangements surrounding your Thrift Savings Plan is complicated– and frankly, it’s scary. Whatever choices you make with it today will have an impact on the rest of your life.

A lot of elements of the TSP – like the return on different investment funds – are out of your control. But there are three things that you do have power over, which can impact your TSP:

  • Time
  • Compound Interest
  • Contribution

What TSP payment options do you have after you retire?

How you pull money out of your TSP will depend on your financial situation and goals. There are options for one-time lump sums, options for lifetime payments, and even a default option if you never touch your TSP. United Benefits Retirement Specialists can explore your TSP payment options with you to determine what would work best for you and your goals.

  • Single Payment Option
  • Monthly Payments (now includes Annual or Quarterly Payments)
  • Annuitization (MetLife) – Lifetime Income
  • Required Minimum Distribution (RMD)
  • Transfer (also known as Rollover)

Single Payment Option

In the past, the single payment option meant you could withdraw any amount from the TSP that you desired. However, you could only do so one time (hence the name “single” payment). After that, your next withdrawal would have to take out all the remaining TSP funds at once. Fortunately, now that the TSP Modernization Act of 2017 has been enacted, you can actually withdraw amounts of your choice from TSP up to four times while you are actively working penalty-free if you are at least age 59.5 or above.

Once you are retired, you can make an unlimited amount of withdrawals that are separated by 30 days. The new changes have certainly increased the flexibility of withdrawals. However, too much access can be a bad thing for some people so you need to take that into consideration because you don’t want to deplete your account too soon into retirement and run out of funds.

Monthly/Quarterly/Annual Payments

If you set up monthly payments, you can arrange for any amount out of your TSP to be paid to you monthly. Now (also thanks to the Modernization Act) you can actually opt to receive your payments quarterly, or even annually. Also, now you don’t have to wait for open season to make any changes. You can start, stop or change that amount any time of the year and still make lump sum withdrawals.

Required Minimum Distribution (RMD) Option

If you turn 72 and haven’t accessed your Thrift Savings Plan or haven’t met the Required Minimum Distribution (RMD), TSP will automatically send you a check to meet the RMD. In the past, you had to initiate the RMDs or be penalized if you had not.

TSP Annuitization Option through Metlife

Another TSP option available to you is annuitization through Metlife, which provides a lifetime income to you. This is the same old-school annuity option that has been provided since its inception in 1986.

On the one hand, it could provide a lifetime of level income that may last longer than your actual TSP balance. However, you will also in essence be surrendering your actual TSP account balance in exchange for the annuitization. You can no longer make lump sum withdrawals from it in case of emergencies. Additionally, the annuitized income could cease whenever you pass away – regardless of how much money you actually had left in TSP. So life expectancy is a major factor to take into account here because the annuitization is irrevocable.

In addition, beneficiaries are not an automatic feature of this annuitization. You can elect to have a beneficiary, but it will reduce the monthly payment that you receive. Same for increasing income – you can elect to have an increasing income that is capped at 2% each year in order to attempt to keep up with inflation during your retirement, but that too will reduce your monthly income.

Transfer/Rollover Option

Another option available to you is to move the funds from your TSP balance into your own Individual Retirement Account (IRA). You will therefore have more access to it depending on the new account you choose – but you need to take things like taxes and market volatility into consideration while doing so to make sure it matches your retirement strategy. This is not a one-size-fits-all option but if you want to utilize your TSP as a third source of income during your retirement, it can be a great solution.

United Benefits offers several annuity options, including fixed index annuities. Our fixed index annuities can often provide lifetime income greater than the TSP Annunitization option while still allowing you access to your funds if needed. In addition, beneficiaries are automatically included without a reduction in your monthly check.

Fixed index annuities allow you to participate in market growth without taking market losses. In addition, not only can your balance increase with market growth but your monthly payments can as well. That means your income has the potential to increase at a much higher rate in order to help you keep up with inflation.

The Bottom Line

The Thrift Savings Plan is one of the most flexible pieces in your retirement benefit puzzle. It is imperative to understand the different options available to you and how they fit into your retirement plan BEFORE making an irrevocable decision. Having a trusted financial professional that can not only help with your TSP but can also see the larger picture of your retirement plan is crucial. United Benefits Retirement Specialists can help you explore your options based on your unique situation. Schedule a free one-on-one retirement consultation by filling out the form below.

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