Saving money for retirement should always be a priority. A thrift savings plan is a fantastic way for federal employees to prepare for a secure financial future during retirement.
What Is a Thrift Savings Plan?
A thrift savings plan (TSP) is a designated retirement savings plan for federal employees and members of the uniformed services in the US. Since it is a plan offered by your employer, this means your thrift savings plan is a qualified retirement plan.
A savings and investment plan like a thrift savings plan is considered a defined contribution plan. What does this mean for you? The retirement income you receive will depend on how much you contribute during the years you are employed by the federal government and the accumulated earnings.
There are required minimum withdrawals, but you can only do so monthly, quarterly, or annually. The withdrawal amount can be a specific dollar amount or it can determined by your account balance and estimated life expectancy.
Your TSP is a retirement savings and investment plan that has a contribution limit that changes each year. For 2023, the contribution limit is $22,500, according to the US government. If you are aged 50 or older, you can make catch-up contributions of $7,500.
Is a Thrift Savings Plan a 401k?
A thrift savings plan offers the same type of savings and tax benefits that private sector businesses offer employees with a 401k plan. Because of this, people often wonder if a thrift savings plan is a 401k plan. A TSP isn’t a 401k plan, but it functions similarly to a 401k plan used by private companies.
Is a Thrift Savings Plan a Traditional IRA?
Retirement planning can be complex, especially when it comes to understanding the differences between a thrift savings plan and a traditional IRA. A thrift savings plan is not the same as a traditional IRA. Even though they are both retirement savings plans, they are two distinct entities and differ in their respective features.
You can have a thrift savings plan and an IRA at the same time. Both have their benefits since they are separate, distinct plans. You have higher contribution limits with a thrift savings plan and matching employer contributions. However, you have more flexibility and control over your investments with an IRA.
Why Is a Thrift Savings Plan a Good Idea?
Investing in a Thrift Savings Plan (TSP) can be an effective way to save for retirement. It offers many advantages, such as tax benefits, investment options, withdrawal rules, and loan rules. All of these features make the TSP an attractive investment option for you if you want to maximize your retirement savings.
1. Tax-Deferred Contributions
Making contributions to a TSP can help lower your tax bill in the current year as they are made on a pre-tax basis. This process deducts money from your paycheck before taxes are applied, thereby reducing your taxable income.
2. Tax-Deferred Growth
Tax deferment is one of the main benefits of investing in the TSP—you don't have to pay taxes on any earnings you make until you withdraw your money. This not only allows for faster money growth but also ensures your investments benefit from tax exemptions each year.
3. Rollovers
Leaving federal service doesn't have to mean leaving your retirement savings behind. Transferring your thrift savings plan into an IRA or another retirement plan allows you to continue saving for retirement while enjoying the tax benefits of an IRA or other plan. This is a great way to maximize your long-term retirement savings and ensure that you are prepared for the future.
4. Employer Matching Contributions
This plan offers matching contributions from the federal agency, which essentially provides free money for employees who choose to participate. By taking advantage of this benefit, federal employees can significantly increase their retirement savings and ensure a more secure financial future.
This matching is done on a sliding percentage scale that maxes out at 5%. If you contribute 5% of your salary to your thrift savings plan, you can get a match for the same amount, effectively doubling your contribution. If you don't contribute anything, this will contribute one percent of your annual salary.
5. Investment Options
A thrift savings plan gives you some investment options to choose from. These include:
- Fixed Income Index Investment (F) Fund
- Common-stock Index Investment (C) Fund
- The Small-Capitalization Stock Index Investment (S) Fund
- Government Securities Investment (G) Fund
- International-Stock Index Investment (I) Fund
- Specific Lifecycle (L) Funds
- Mutual Fund Window
Start Preparing for Your Retirement
Investing in a TSP account offers numerous tax advantages that can help you save money and grow your wealth. Let us help with your retirement plans.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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