Thrift Savings Plan

A Thrift Savings Plan (TSP) is a retirement and investment plan for federal government employees. Apart from federal employees, it is offered to uniformed service members. It is a defined contribution plan and is similar to the benefits that other savings and retirement plans offer employees in the private sector.

The highlight of a federal thrift savings plan is that it is, in many ways, similar to the 401(K) plan available to private sector employees. However, it has certain unique aspects. For instance, it offers six types of retirement funds, including a mutual fund scheme. The Internal Revenue Code has stipulated an annual contribution limit, and compliance is a must.

• A Thrift Savings Plan (TSP) is exclusively available only to federal government employees and uniformed service members to enable them to meet their retirement, savings, and investment needs.
• It mirrors the benefits or provisions available to employees under the 401(k) plan. However, it also has certain unique features related to eligibility, investment options, and employer contributions.
• It consists of six retirement savings funds and a G Fund offered by the government.
• The TSP, 401(k), and Roth IRA offer investment options to employees and individuals, and they differ in terms of eligibility and contribution styles, among other things.

A Thrift Savings Plan (TSP) is a retirement, investment, and savings plan that is tax-deferred and is designed only for federal employees. Uniformed service members can participate in a thrift savings plan by saving a portion of their income through payroll deductions. Like 401(K), the government, as an employer, usually matches employee contributions unless allocation changes occur.

Per the thrift savings plan definition, an individual covered by the Federal Employees Retirement System (FERS) can benefit from the other two retirement plans - social security and retirement annuity system. If an individual works in the military, the TSP acts as a supplement. Simply put, a federal employee can start contributing to a TSP account without a waiting period. It is specifically designed for federal employees who want to save money for retirement.

The contribution system is simple: the first 3% is matched on a dollar-to-dollar basis, and the next 2% is matched at half, which means the employer contributes 50 cents for every dollar. There are traditional and Roth TSP options to choose from. In the former, an individual pays taxes on withdrawal; in the latter, contributions are made on an after-tax basis.

The six thrift saving plan funds and one mutual fund offered by the US government are:

• Common-Stock Index Investment (C) Fund
• Government Securities Investment (G) Fund
• International-Stock Index Investment (I) Fund
• Fixed-Income Index Investment (F) Fund
• Specific Lifecycle (L) funds
• Small-Capitalization Stock Index Investment (S) Fund

In 2023, the annual contribution, excluding employer contribution, is $22,500. Matching contributions go up to $66,000.

If an individual makes additional or excess contributions to their TSP account that exceeds the annual limit, they can request a refund through a TSP-44 form.

There are two ways a working federal employee can withdraw money from their TSP accounts. First, they can withdraw money if they are facing a financial crisis. Second, they are allowed to withdraw after the prescribed age of withdrawal, which is 59 ½.

To qualify for a thrift savings plan withdrawal under financial hardship or crisis, an employee must meet at least one of the following conditions:

• They must have negative and recurring monthly cash flows, which can be validated through bank statements and other financial records.
• Medical emergencies and expenses, including household improvements not paid or covered by insurance, are ground for withdrawal. In this context, household improvements refer to changes made for medical reasons. For instance, installing accessibility aids or a ramp for movement are considered.
• Personal casualty and uncovered losses by insurance, where personal casualty refers to sudden losses, are allowed. For instance, if a natural disaster harms a house, it will be categorized as a personal casualty.
• If an employee faces legal expenses or court proceedings due to separation or divorce, they qualify for TSP withdrawals.
• If a disaster is declared with a federal emergency, it becomes a qualifying event under TSP withdrawal due to financial hardship.
• Under the financial hardship clause, an employee cannot withdraw less than $1000, which is applicable to both civilians (employees) and uniformed service members.
• Per the financial hardship provision, certain limitations on withdrawal are applied. It states that employee contributions and earnings accrued can be withdrawn, but employer contributions and earnings accrued are not allowed for withdrawal.
• If an individual has two separate TSP accounts, a civilian TSP and a uniformed services account, they can make the financial hardship withdrawal from the active TSP account.
• When applying under the financial hardship provision, an individual must submit a certified copy of the penalty of perjury, signifying the authenticity of financial hardship, along with their completed application.

When withdrawals from a TSP account are made under the financial hardship provision, they are subject to federal income tax and, in some cases, state income tax. If an individual applies to withdraw before the age of 59 ½, an early withdrawal penalty is applied in addition to taxes.

To qualify for 59 ½ in-service withdrawals, one must meet the following conditions:

• An individual must be 59 ½ years of age.
• They can only withdraw vested funds that they are entitled to hold based on the years of service. Vested funds refer to contributions made by an individual and the earnings accrued on them.
• The minimum withdrawal amount is $1000, even if the vested funds in the TSP account are less. If it is less than $1000, an individual can withdraw the entire amount.
• Only four withdrawals per year are allowed from the thrift savings plan.

Let us consider the following instances to understand the concept even better:

Example #1

Suppose Laura is a federal employee who started working at 25. For the next 34 years, she made annual TSP account contributions of $18,000. Along with this contribution, the government, as an employer, matched her contributions with $13,500.

Hence, Laura’s total annual contribution = $18,000 + $13,500 = $31,500

The US government offers Laura six funds and a single mutual fund scheme in which she can invest this retirement fund. The growth of her investments will depend on fund performance and investment returns.

By the time Laura turns 59 ½, she has the following amount in her TSP account.

$31,500 x 34 years = $107,000

If she decides to withdraw funds during the service due to financial hardship, she will be required to pay a 10% penalty. After 59 ½, she can withdraw four times per calendar year only from the vested funds.

In this way, Laura secures her future retirement using the TSP provision.

Example #2

According to the January 2023 report related to TSP, until December 2021, the G Fund had $210.9 billion in assets. The law states that the G Fund must be invested in nonmarketable US treasury. At the time, it covered 6.7 million federal employees.

To meet their debt obligations, the government decided to hold reinvestment in the G Fund (part of the Thrift Savings Plan) under the Extraordinary Measures rider. Certain other funds and retirement benefits are also featured on this list. This was expected to have financial implications for retirees.

The US government backs the payment of principal and interest payable to members of the G Fund. However, due to the prevailing financial conditions, a thrift savings plan problem was identified. The US Treasury had to take special measures to prevent a default on the statutory debt limit.

At the time, it was unclear how long these measures would last. However, experts recommended spending cuts, an increase in the debt ceiling, and curbing new expenses until the situation could be brought under control.

This shows the value and importance of the TSP to federal employees and uniformed service members and how it affects government spending.

This section discusses the benefits of a thrift savings plan.

• It is exclusively available to federal employees who receive it as a three-part retirement package, where Social Security and FERS Basic Annuity are the other two.
• Contributions to a TSP are made pre-tax. Hence, they are not subject to federal income tax in the year of deposit. This reduces an employee’s taxable income and likely leads to tax savings.
• Investment earnings under a TSP remain tax-free until they are withdrawn in retirement. Hence, the effect of compounding applies to an employee’s retirement savings.
• An employer’s matching contributions under a TSP arrangement boost an individual’s savings.
• Once a TSP account is active, even if an individual changes jobs within the federal government, their account moves with them.
• A TSP allows individuals to invest in various investment funds based on their risk tolerance and investment preferences.
• The G Fund, which invests in US government securities, offers guaranteed principal and interest.

Retirement plans are of many types, aiming to give a financially independent life to retirees. Three most common ones among them are TSP, 401(K) and Roth Individual Retirement Account (IRA). Let us explore the differences between the two to identify what is unique about them:

• A TSP is for federal employees and uniformed service members only, whereas 401(K) is for private employees in varied sectors. In contrast, the Roth Individual Retirement Account (IRA) is open to anyone who wishes to have an account.
• TSP is funded by payroll deduction, which is mandatory for all federal employees who choose to participate in this scheme. Under 401(k), an individual can make manual contributions or have the amount deducted from payroll; it depends on an individual’s choice. Individuals can open a Roth IRA account at various relevant financial institutions and make direct deposits.
• TSP offers several mutual funds as investment options. Under 401(k), investment options vary based on employer choices. For a Roth IRA, individuals can choose any investment option/s the custodian/financial institution offers.
• In TSP and 401(K), employers contribute. On the other hand, a Roth IRA is an individual contribution account.
• Individuals can take loans from a TSP account if they fulfill certain conditions related to the purpose of the loan. Loans under 401(k) are available if the specific plan offered by an employer allows them. In the normal course, individuals cannot withdraw money as a loan from a Roth IRA account.

This has been a guide to what is a Thrift Savings Plan. We compare it with 401(K) and Roth IRA, and explain its terms of withdrawal, benefits, and examples. You may learn more about financing from the following articles –

• Spendthrift Trust
• Paradox of Thrift
• Defined Contribution Plan