Certified Safe Money Admin


Certified Safe Money Admin


Safe Money Advice and Strategies – Federal Employee and TSP Safe Money Strategies

Employees of the federal government may be eligible for retirement savings benefits. One option is the Thrift Savings Plan (TSP). You could attain tax-advantaged savings, as well as a reliable income stream in retirement, if you participate in the TSP.

Understanding how the TSP plan works and knowing about the funding alternatives that are offered can help you determine which of these financial “tools” could best help you meet your specific retirement income goals.

What is the Thrift Savings Plan, and How Does it Work?

The Thrift Savings Plan, or TSP, is a retirement saving and investment plan for federal employees and uniformed services, including the Ready Reserve. Congress established this plan in the Federal Employees’ Retirement System Act of 1986. The Thrift Savings Plan offers the same types of savings and tax benefits that many private companies offer to their employees.

The TSP is a defined contribution plan, meaning that the retirement income you generate from your account will depend on how much you and your agency put into the account and any earnings that are accumulated over time.

Employees can contribute funds into the TSP – up to a maximum allowable amount – each year. The TSP is automatically set up when an individual is initially hired. In addition to personal contributions that the employee/participant makes, agencies may also make an additional deposit and a matching contribution to the account.

Because the employee contribution to the TSP is deposited via payroll deduction, an employee/participant will need to make an election through his or her agency or service in order to do the following:

   Begin TSP contributions (if not automatically enrolled)

   Increase or decrease the amount of the contribution (if automatically enrolled)

   Change the dollar amount of employee contributions or tax treatment

   Stop the TSP contributions altogether

Two tax treatment options are offered through the TSP. These are traditional and Roth. With the traditional option, the contributions that the employee makes will be pre-tax. The earnings grow tax-deferred until the money is withdrawn in the future. With no annual tax on these earnings, the TSP account’s value can grow and compound exponentially over time.

Alternatively, if the Roth TSP option is chosen, funds will be contributed to the TSP on an after-tax basis. However, the money can accumulate tax-free. Likewise, withdrawals are also free of income taxation, regardless of the then-current income tax rates.


TSP Fund Options

Like any other type of investment portfolio, the funds you choose for your TSP account must be appropriately matched with your individual financial needs and goals – both for the short term and the long term.

With that in mind, it is essential to have a good understanding of what each of the funds has to offer, as well as the risk you could incur, and who may or may not be a good candidate for each of the investment alternatives.


TSP G Fund

The TSP’s G Fund is the most conservative of the TSP fund options. This fund consists of a non-marketable U.S. Treasury security that offers both principal and interest that the United States government guarantees. However, the tradeoff for this principal protection is a relatively low rate of return.


TSP F, C, S, and I Funds

The Federal Retirement Thrift Investment Board currently contracts with BlackRock Institutional Trust Company, N.A. to manage the F, C, S, and I Fund assets. The F and C Fund assets are held in separate accounts.

The F, C, S, and I Funds are index funds, and each of these funds is invested in order to replicate the risk and return characteristics of its appropriate benchmark index. Therefore, these four index funds’ performance will typically match the corresponding broad market indexes’ return.

Both the growth potential and the possible risks of these funds are determined by the underlying index that each of these TSP funds matches. Before choosing any of these funds for inclusion in one’s TSP account, it is critical to understand how the return is determined and the potential risks to the principal.


TSP L (Lifecycle Funds)

TSP participants may choose to invest in the L Funds, which are also referred to as Lifecycle Funds. These are funds that invest in a variety of the other core TSP funds, based on professionally determined asset allocations, as well as in accordance with your time frame until retirement.


Withdrawal Options with the Thrift Savings Plan

Two types of withdrawals can be made from the Thrift Savings Plan. These include:

   Partial TSP Withdrawal

   Full TSP Withdrawal

TSP participants may take a partial withdrawal – even if already receiving installment payments. In addition, part or all of the funds in a TSP account may be used to purchase an annuity through the OPM’s (Office of Personnel Management) outside vendor.

It is important to note that if a plan participant receives a TSP withdrawal payment before he or she has reached age 59 1/2, they may have to pay an IRS-imposed 10% early-withdrawal penalty on any taxable part of the distribution that is not transferred or rolled over.

This penalty tax is in addition to the regular income tax that may be owed. There may, however, be certain exceptions. For example, if an individual leaves federal service during or after the year he or she reaches age 55 – or the year they reach age 50, if they are a public safety employee – then the 10% penalty tax does not apply to any withdrawal that is made that year or later.

There are a myriad of tax-related rules that can pertain to distributions from the Thrift Savings Plan. For that reason, it can be beneficial to discuss various options with a financial professional or a CPA (Certified Public Accountant) before making a decision about any income or withdrawal option.


Traditional versus Roth TSP Options

The Thrift Savings Plan offers two tax treatment options for employee contributions and income in retirement. These are traditional and Roth. For instance, if a participant opts to make traditional contributions into his or her TSP account, they will defer paying income tax on the amount of the contribution. Likewise, the earnings that are generated in the traditional TSP account will be tax-deferred until the time of withdrawal.

When withdrawing money from a traditional TSP account, then, the entire amount of withdrawal will typically be subject to taxation. That is because none of this money has been taxed in the past.

If, however, a TSP plan participant makes Roth contributions, this money will be contributed on an after-tax basis (unless they are a member of the military and are making tax-exempt contributions from combat pay).

The funds that are in a Roth TSP plan are allowed to grow tax-free. Likewise, the withdrawals that are taken from this type of account at retirement are withdrawn tax-free. This, in turn, could allow more net income to use for paying everyday living expenses and other needs and wants in the future.


Traditional TSP versus Roth TSP

The Treatment of: Traditional TSP Roth TSP
Contributions Pre-tax After-tax
Paycheck Taxes are deferred, so less money is taken out of the participant’s paycheck. Taxes are paid upfront, so more money comes out of the participant’s paycheck.
Transfers In Transfers are allowed from eligible employer plans and traditional IRAs. Transfers are allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s.
Transfers Out Transfers are allowed to eligible employer plans, traditional IRAs, and Roth IRAs. Transfers are allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs.
Withdrawals Taxable when withdrawn. Tax-free earnings if five years have passed since January 1st of the year the participant made their first Roth contribution, and they are age 59 ½ or older, permanently disabled, or deceased.

Source: www.tsp.gov


As a TSP participant, you may make both traditional and Roth contributions if you choose to do so. In this case, you are allowed to contribute any amount or percentage that you choose, subject to Internal Revenue Code (IRC) limits.

For example, the Internal Revenue Code places limits on the dollar amount of contributions that can be made to the TSP each year. These maximum contribution limits can change on an annual basis. In 2021, the maximum annual contribution is $19,500 for participants who are age 49 and younger and $26,000 for those who are age 50 and older.


Benefits of Participating in the Thrift Savings Plan (TSP)

The Thrift Savings Plan’s purpose is to help participants save for retirement through voluntary employee contributions and employer matching contributions for eligible employees.

Several benefits can be gained by participating in the TSP. These include:

    Simplicity – Enrolling in the Thrift Savings Plan only takes a few minutes, and the benefits begin within a month after signing up. Once a participant has established a TSP account, there are no additional requirements. This is because the contributions, the matching contributions, and the portfolio rebalancing are all automatic. The choice of TSP funds also makes it easy to select options that match a participant’s risk tolerance, time horizon, and financial objectives.

    Low Costs – The charges and fees that are associated with investing in the TSP are quite low, especially when compared to commissions and fees that are incurred on individual investments and insurance products.

    Matching Contributions – In addition to the employee contribution, the agency or service may also make matching contributions, which can help to boost accumulation in the participant’s TSP account.

    Tax Advantages – Depending on the type of TSP tax treatment that is chosen – traditional or Roth – TSP contributions may be made on a pre-tax basis, or alternatively, withdrawals may be received tax-free. In either case, the gains that take place inside of the TSP account are either tax-free or tax-deferred and, in turn, can help the funds compound exponentially over time.

    Wide Spectrum of Investment Options – There is a wide selection of investment options to choose from in the Thrift Savings Plan. These range from conservative, safe alternatives to growth-oriented equity options. The variety of choices can help employees/participants best match their specific needs and goals.

The TSP can be particularly beneficial to workers in the federal pay scale’s mid and upper ranges. These individuals are not likely to achieve adequate retirement income – per the FERS’ replacement rate (Federal Employees Retirement System), basic annuity, and Social Security. Because the traditional funds that are contributed into the TSP can be deposited on a pre-tax basis, this can ultimately reduce a participant’s taxable income.

Likewise, there is also a considerable benefit for service members who invest in the Thrift Savings Plan while they are deployed. This is because the income paid to soldiers during this time is tax-exempt, while the contributions that are made into a traditional TSP are pre-tax.

In addition, the future distributions from the Thrift Savings Plan to these individuals will also be tax-free. So, the TSP can essentially mimic the Roth IRA, but with much higher contribution limits – which are some nice benefits that non-service members cannot match.


Do You Still Have Questions About the TSP?

If you still have questions about the Thrift Savings Plan, or if you would like to determine how best to coordinate the TSP with your other retirement savings, it is recommended that you talk with a financial advisor who is well-versed in federal benefits.

Please feel free to reach out to us directly at [email protected]. We look forward to helping you with your retirement savings and income-generating strategies.

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