For private-sector employees, 401(k) plans have been a mixed bag, with some plans offering lucrative matching contributions and solid investment options while others fall short on both fronts. Federal employees aren't eligible to join a 401(k), but the federal government has given them an even better option: the Thrift Savings Plan, or TSP for short. The TSP has many features that are similar to what a 401(k) offers, but it also gives federal workers key advantages over most 401(k) plans. Let's look more closely at the Thrift Savings Plan and what makes it such a great option for those who are eligible.
The ABCs of TSPs
Federal law governing retirement plans treats TSPs in largely the same way that it does 401(k) plans. TSPs have the same contribution limits as 401(k)s, with those under age 50 being eligible to set aside up to $18,000 in a TSP and those 50 or older getting to make an additional catch-up contribution of $6,000. The TSP allows you to pick whether you want to save pretax or after-tax money, accepting both traditional and Roth-style contributions that allow you to decide whether you want to pay taxes on your retirement savings upfront or after you make withdrawals in retirement.
In addition, the TSP shares many of the favorable features that the best 401(k) plans have. For those federal employees who are covered under the Federal Employee Retirement System, matching contributions are available, with the agency that employs workers contributing as much as 4% of base salary to a TSP account if the worker makes an employee contribution of 5% of salary or more. In addition, employees receive a 1% automatic contribution by their employing agency regardless of whether they make contributions of their own. TSPs also allow participants to take out loans under certain circumstances, and in other cases, in-service withdrawals might be available to offer short-term financial relief in extraordinary situations.
What makes TSPs so special
Yet as favorable as some of these TSP provisions are, what really sets TSPs apart is in the details. In many 401(k) plans, the costs for various investment options are extremely expensive, eating into the benefits of investing through the retirement plan. Expense ratios for the various TSP investing selections are between 0.026% and 0.039%, which equates to just $2.60 to $3.90 per year for every $10,000 in a participant's account. By contrast, expense ratios of as much as 1% or more for some 401(k) investment choices can cost people more than $100 per year for the same amount invested.
Some will take issue with the Thrift Savings Plan's somewhat limited investment menu, which generally includes just a single choice in each asset class. Yet the choices span the full range of popular investment options, including large-cap and small-cap U.S. stock funds, an international stock fund, two fixed-income funds, and a range of target-date funds that match up to certain expected retirement dates. Because there's only a single option available, it's far simpler for participants to set up a basic asset allocation strategy without having to worry whether they're choosing the best fund option for the task. Over time, TSP performance has been quite solid, with the cheap expenses translating into more money in participants' pockets over the long haul.
When it comes time to retire, the TSP offers multiple withdrawal options. Lump sums are available for rollover to an IRA, or you can choose to take partial withdrawals in whatever amount you choose. You can also apply all or some of your balance toward a lifetime immediate annuity, which will make monthly payments to you for the remainder of your life. Required minimum distribution rules apply to the Thrift Savings Plan as well, so you'll have to start taking withdrawals by age 70 1/2 or else risk forfeiting the required withdrawal account to the TSP.
The Thrift Savings Plan is a huge asset for eligible federal workers. If you have access to the TSP, make sure to take full advantage of its benefits and count yourself lucky to have such a strong retirement savings option available to you.
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