As a federal employee, the Thrift Savings Plan is one of the greatest ways to plan for retirement and build wealth. This blog will go over the basics of TSP to better understand the program.
Many federal employees have similar questions regarding the Thrift Savings Plan, both while they’re working and into retirement.
“What are the funds, and how do they work?”
“What is the matching, and how does it work?”
“Which fund is right for?”
“How much can I contribute?”
“Is there a limit to what I put in?”
“What choices do I have, and how do they impact myself and family for the remainder of my life?”
- WHAT IS THE THRIFT SAVINGS PLAN?
The Thrift Savings Plan, or “TSP,” 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 THE THRIFT SAVINGS PLAN MATCHING WORK?
The 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.
Remember, the matching is per paycheck! You can change your contribution to every pay period, but your matching is only per pay period.
The agency matches 100% up to 3% of your contributions(plus that extra automatic 1%).
The agency will match 50% of the 4% and 5% that you contribute. 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 account at Thrift Savings Plan.
One of the number-one pitfalls that federal employees make is not taking advantage of the matching program.
New employees now automatically default to 3%, which includes the full 100% matching.
Please take advantage of this!
HOW MUCH CAN I CONTRIBUTE TO MY THRIFT SAVINGS PLAN?
The IRS determines this, and 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.)
So what would be the benefit of actually switching from a hard dollar figure to a percentage of pay?
For employees who set their contribution as a percentage, that percentage stayed consistent, and the amount of money grew automatically with their paycheck! They didn’t have to remember to update it. In contrast, the employees who set a hard dollar amount based on their 5% at the time may have missed out on more TSP savings by forgetting to update the dollar amount as their income changed.
If you’re trying to get just the matching, we always recommend choosing the 5%, because when you get a pay increase, that amount is going to update automatically to go along with your pay increase.
- WHAT’S THE DIFFERENCE BETWEEN THE TRADITIONAL AND ROTH THRIFT SAVINGS PLANS?
In May of 2012, the TSP introduced the Roth TSP 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
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.
Again, everything you take out of the traditional TSP is going to be taxed as income when you make those withdrawals.
THE ROTH THRIFT SAVINGS PLAN
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.
Your Roth contributions are post-tax, which means you are paying taxes on the contributions while you are working.
So, upon withdrawal, all contributions and interest earnings are tax-free.
That’s a tremendous benefit! One of the quirks to this, though, is that you have to be in the Roth plan for at least five years before making any withdrawals.
IS ONE TSP BETTER THAN THE OTHER?
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?
You could put a partial amount into the Roth, and partial amount into the Traditional (remember, the matching from the agency is going into the Traditional regardless).
With the Traditional TSP, pre-tax contributions reduce your current tax liability, but the contributions and the growth are all taxable when you withdraw.
It all comes down to choosing between tax benefits now versus tax benefits later.
To make that choice, you have to determine things like, “What is my income now? What is my tax bracket today? What may it be when I retire?”
The choice between the TSP Traditional and the TSP Roth is such an individualistic decision, and there’s no single answer for everyone.
But in general, our best recommendation is to consider both.
- WHAT ARE INVESTMENT OPTIONS AVAILABLE THROUGH TSP FUNDS?
We always recommend a visit to www.tsp.gov. They have great information about each respective fund, with different charts and historical content that you can read to get in-depth information on TSP.
TSP offers several different investment choices for you. 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 indexed to the S&P 500. The index contains the 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 U.S. Companies.
THE I FUND
The I Fund is an international stock fund. In the I Fund is invested in the Morgan Stanley Capital Investment EHFE, 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 LifecycleFunds or L Funds.
The L Funds can be confusing: 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. You can pick like the L 2025, L 2030, L2035, L 2040, L2045, L 2050, L2055, L2060, and L2065. All you’re doing there is picking the retirement “end date” or time horizon, and an algorithm is automatically reallocating your funds to become more and more conservative as that particular year approaches.
THE FEES FOR EACH FUND
TSP investment fees can get as low as .04% – that’s only 40¢ per $1,000 invested, the low cost can help your nest egg may grow far faster.
WHICH FUNDS ARE BETTER?
Let’s take a look at some of the recent returns for each of the funds, according to TSP.gov.
As stated: the G Fund will never lose money. Even if you go back to the inception of the G Fund, it’s not going to be red(negative gains). That said, its average return over the past ten years is 2.22%. As of August 24, 2020, the yearly yield is .65 for 2020. It can change every year, but you’re not going to lose money.
As for the rest of the funds, each has at least one year in the last decade when they’ve lost money. The F Fund lost 1.68% in 2013. The 10-year average return is 4.04%, higher than the G but with some risk. The C Fund has averaged 14.18% in the last ten years. The S Fund, at a 14.07% 10-year average return. The I Fund averaged 6.77% over the same ten-year period.
Typically, the more aggressive a fund is, the higher the return opportunity you’ll have in the long term.
So the G Fund is your safe fund. The rest of the funds are going to lose money now and then. Why is this important?
We’re not telling you where to put your money, but if you look at examples from 2008, or 2001 and 2002, there are periods when the market drops. If you’re about to retire during one of those periods, it can make a significant impact on your retirement.
An example using the L Funds (remember, those are a “combo” of all the other funds) TSP automatically puts more and more of your money back into the G Fund over time, protecting the nest egg that you’ve built inside TSP as you get closer to retiring. If you pick L2030, then by the year 2030, they will have put 74% of your money into the G Fund, where it’s safe. At that point, only 26% of your funds will be at risk.
So if you’re about to retire, you need to make sure you’re protecting your money.
The next question we often hear is, “How far out from retirement should you look at moving more money into the G Fund?”
Everybody is different, so it partially depends on your risk tolerance. It’s good as you get closer and closer to retirement to take more and more of your retirement money and reposition it in a safer spot where you can start protecting it. While you’re working, that safe place can be the G Fund.
Now on the flip side, let’s say you’re young, and you’re just now getting hired by a federal employer. You can take the losses. If you have a 2008 crash and you’re in your second or third year, it’s okay because you have plenty of time.
Having your money in more aggressive funds when you’re younger is traditionally the advice given: whereas once you get closer to retirement, you should start protecting what you’ve built.
- WHAT PARTS OF MY THRIFT SAVINGS PLAN CAN I CONTROL?
There are three things that you can control inside TSP:
- Time
- Compound Interest
- Contribution
Here’s an example: let’s say you’re earning $85,000, and you contribute 5% to TSP; receiving the 5% matching, with a 2% COLA; and let’s say you average a 5% return from investment funds. If you did that for ten years, you would have $118,000. For twenty years, it would be $338,000. For thirty years, you would have $728,000. The only difference between those results is how long you contributed, and how long you let your money grow.
The lesson there is clear: start today and don’t put it off.
The second thing you can control is compound interest. “What funds are my money in, inside TSP?” Again, we know that the market’s last ten years won’t be a precise prediction of the next ten years. But if you made the same income and contributions as above and then got a 3% return for 30 years, you’d have $531,000. But if you made the equal contribution and you were in a more aggressive fund, and maybe you could average around 8% interest: then you would have $1.2 million. That’s a big difference just based on what funds you choose!
Are you going to keep all your money in the G Fund? Or are you going to consider diversifying the little bit to try to get a higher average return? Remember, everybody’s situation is a little different.
The last thing you can control is the contribution. Remember, 5% is the matching limit, but you can put in more. So if you took the same employee for 30 years with a 2% COLA, putting in 5% with a 5% return, they’d earn $728,000 (that number we saw earlier). But let’s say you could contribute more, like 10% or 15%– over 30 years, that 15% contribution would result in $1.4 million!
So to recap: if you start today, you can control time (to a degree); what funds you choose, and how much you put into TSP. Those are all up to you.
If you can act on just one of these three items, you can make the difference in your retirement because it’s in your control.
We run into very few people that can actually do all three and do all three well. Achieving success with all three is sometimes called a trifecta.
That means you gave yourself a lot of time to contribute; you tried to maximize your contributions, and you chose the right funds over your career.
For example, that $85,000 career with a 2% COLA for 30 years, contributing 15%, with no catch-up provision, receiving 5% matching, with an average of 8% return from investment funds over the 30 years can end up with $2.4 million! You can essentially become a multimillionaire just by planning, having the right education, having the proper guidance, and being smart.
We’re running into more and more federal employees that are at least doing one or two of these things right. We’re seeing more and more people that are setting themselves up for a secure retirement.
For the younger folks, as far as what’s changing within the federal employee benefits and Thrift Savings Plan, this is even more important than ever.
We don’t know what will happen with things like social security or FERS in the future, but this is your money, so take advantage of it!
YOU DON’T HAVE TO MANAGE YOUR THRIFT SAVINGS PLAN ALONE.
These are big, lifelong decisions; and can be overwhelming. So it’s essential to work with a professional who can not only guide you through the options that you have but give you an idea of how different decisions will impact you.
Our job is to understand your situation and help you, as someone who understands the FERS, the CSRS, Social Security, FEHB and FEGLI we can help you position your TSP to meet your needs and goals.
*Special note for 2020 under the CARES ACT changes have been made to the TSP that are time-sensitive and only available for 2020. You can request a guide on the CARES ACT and the impacts on the TSP program.
Do you know if you’re getting the maximum out of your TSP right now?
We can help you figure that out!
United Benefits has assisted thousands of federal employees on several impactful topics. We can help you, too. Ask us anything!