Thrift Savings Plans (TSPs) are defined contribution retirement plans for federal employees and members of the uniformed services. They are administered by the Federal Retirement Thrift Investment Board and are part of the Federal Employee Retirement System (FERS) system. Participants in TSPs can choose from fifteen funds of varying risk profiles for investment. TSPs have low operating costs and are accompanied with relatively fewer risks as compared to other retirement plans. The advantages of TSPs are their tax benefits and high contribution limits. The disadvantages of TSPs are that they offer a relatively conservative selection of instruments for investments.
With 5.9 million participants as of January 2021, TSPs are the world’s biggest defined contribution plans. They are available to both civilians and uniformed members. The intent behind the plans is to replicate the elements of a private sector 401(k) plan within a government setting. TSP participants can roll over 401(k) and individual retirement plans into TSPs, when they shift jobs from the private sector to government jobs, and vice versa. TSPs are defined contribution plans, meaning returns from the plans depend on contributions made to it. As of October 2020, 5% of all new federal employee’s salary is automatically contributed to the plan. The federal government matches the first 3% dollar-for-dollar while the remaining 2% are matched 50 cents to the dollar. Employees can adjust their contribution percentage or choose not to participate in the plans. The 2021 IRS limits for TSP contributions are $19,500 for individuals and $6,500 contributions for those age 50 and over. The total contribution limit (including both employer and employee) in a TSP is $58,000. Contributions to the plan can be taxed in either or both of the following ways: Government agencies either match employee contributions or make a contribution equal to 1% of basic pay. Because the latter contribution is made with respect to the basic pay, it has no effect on the overall tax income. There are fifteen funds available to TSP participants for investment. Out of this figure, five funds are considered core funds that vary in risk profile and are intended to provide a broad exposure to different market segments. With the exception of the G fund, the remaining funds invest in index funds managed by BlackRock Capital Advisers. None of the five core funds account for inflation risk. The five core funds are as follows: Besides the five funds listed above, there are ten lifecycle (L) funds. The L funds mix –and-match constituents of the five core funds to suit the participant’s risk profile and retirement age. The L funds are primarily for those TSP participants who are not interested in managing their portfolio on their own or do not wish asset allocations. The L funds are named based on a target year of retirement. For example, L2025 is targeted at federal employees and uniformed service members who are slated to retire between 2021 and 2027. Similarly, L2045 is for TSP participants who plan to retire between 2043 and 2047. Allocation in L funds is rebalanced every three months. Therefore, the risk profile of an L fund changes as the target date draws near. For example, an L fund with a target date that is farther out will be weighted towards risk and, possibly, have a greater composition of the S and I funds as compared to one with a nearer target date. One thing to remember about TSP funds is that they are index funds i.e., they do not directly invest in the equities listed in their portfolio. Instead, they track the performance of indices that contain these equities. For example, the C fund tracks the S&P 500. TSPs have similar rules for withdrawal and distributions as 401(k)s. TSP participants must take distributions after the age of 72 years. Premature TSP withdrawals incur penalties and are taxed as regular income. TSP participants can also request regular income from TSP accounts by making a request. The payment amount can either be calculated by the individual making the request or it is computed by the agency based on the requester’s age and account balance. The TSP account balance can also be used for loans. Two types of TSP loans are allowed: General Purpose and Residential. The latter is used for purchase or construction of a primary residence. The interest rates on both types of loans, as of April 2021, was 1.625%. The advantage of TSPs are as follows: The disadvantages of TSPs are as follows:Basics of Thrift Savings Plans
Thrift Savings Plan Contributions
Thrift Savings Plans Investment Funds
Withdrawals From Thrift Savings Plans
Advantages and Disadvantages of Thrift Savings Plans
Thrift Savings Plans FAQs
Thrift Savings Plans (TSPs) are defined contribution retirement plans for federal employees and members of the uniformed services. They are administered by the Federal Retirement Thrift Investment Board and are part of the Federal Employee Retirement System (FERS) system.
The 2021 IRS limits for TSP contributions are $19,500 for individuals and $6,500 contributions for those age 50 and over. The total contribution limit (including both employer and employee) in a TSP is $58,000.
The five core investment TSP funds are Government Securities Funds (G), Fixed Income Fund (F), Common Stock Fund (C), Small Capitalization Index Fund (S), and International Stock Market Index (I).
There are ten lifecycle (L) funds. The L funds mix – and-match constituents of the five core funds to suit the participant’s risk profile and retirement age. The L funds are primarily for those TSP participants who are not interested in managing their portfolio on their own or do not wish asset allocations.
TSPs have similar rules for withdrawal and distributions as 401(k)s. TSP participants must take distributions after the age of 72 years. Premature TSP withdrawals incur penalties and are taxed as regular income.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
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