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The Federal Government's Thrift Savings Plan

By Edited Oct 27, 2013 0 0

If you work for the Federal Government, you have access to the Federal Government's Thrift Savings Plan. This includes all of the agencies that make up the Federal Government as a civilian and for those in the Uniformed Services such as the Army, Air Force, Navy, and Marine Corps.

The Thrift Savings Plan, or TSP, is a retirement savings plan in the same vein as civilians and their 401k savings plans. For Federal civilians, the government does offer a matching just like many civilian employers do. They place 1% of your salary into your TSP regardless of your contributions. They then match 100% of your contributions of the first 3% you put into your account, then 0.5% of your contributions up to 5%. So for your first 3% of your contributions, the federal government will put in another 1%. Then for your 4% and 5% limits, they only give you another 0.5% of your contributions. So if you were to put in 5%, the federal government will also put in 5%, making your contributions to your TSP 10% per year. If you are in the military, as far as I know right now, none of the military branches offer matching contributions.

The limits to how much you can put into the TSP is the same as the 401k's. For the 2009 tax year, the limit is $16,500, that is for everyone, military and civilian alike. If you are military however, and deploy to a combat zone, you can put up to $49,000 into your TSP account. Another benefit is because you earned the money tax free, when you start pulling the money out in retirement, the money will also come out tax free. Any earnings that money earns however, will be taxable.

In the past, you had to wait at least a year to receive matching contributions to your TSP account. Now however, you don't have to wait. You can begin contributing to your account as soon as you start and receiving those matching funds. The matching contributions that you receive from your federal agency vests over a three year period however. So to get the whole amount of money your agency put into your account, you will have to wait three years until that money becomes yours.

The reason why I am such a big proponent of the Thrift Savings Plan however is because of it's simplicity. You have five investment options, and then Lifecycle funds to help automate your investments and keep your thought process to investing as simple as possible. Many individuals really do not need any further investment options and the TSP knows this, and therefore make it harder for you to mess things up. Because of the simplicity though, the TSP funds charge 0.03% in expenses. For instance, Vanguard, the price leader for index funds, charges 0.09% on their S&P 500 mutual fund. So in comparison, Vanguard is 200% more expensive than the TSP options. This is one of the biggest reasons why you should contribute to the TSP.

The TSP Lifecycle funds automate your investing by automatically adjusting your investments in regards to when you want to retire. They are like target retirement funds. If you want to retire around 2040, then you choose the 2040 Lifecycle option. What this does is get you a diversified portfolio that adjust to being less aggressive as you get closer to your retirement age. Again, the Lifecycle funds only charge 0.03% for this option. WAY cheaper than what Vanguard and anyone else would charge for the same feature. The only way you could get to the same price point in regards to fund expenses is to have large sums of money to investment. How large, I don't know, but I'm thinking multiple millions of dollars.

For those individuals on the lower tax bracket, and this is especially for the military folks, a relatively new tax credit are for those individuals who earn less money, the federal government will credit you tax money to put money into a retirement plan. It starts at 50% of the first $2000 that you put into any retirement plan. If you do so, you could lower your taxes by $1000. The next level is then 25%, and then 10%. If you are at the lower income brackets, it could make sense for you to then put money into there. Just look at is a your matching contributions for the TSP.

If you are looking to track your performance of your investments, it is actually really easy. While you can't look it up on Yahoo! Finance or any newspaper, but if you look at how the S&P 500 did, you'll see how your C Fund did. If you want to see how your international fund, or the I Fund did, just look at the EAFE index. Same thing in regards to the S Fund, it is the Wilshire 4500 Completion index, and the F Fund is the Barclays Capital U.S. Aggregate Bond Index. The beauty though is the fact that because it is so cheap to invest in these mutual fund indexes via the TSP, your returns should do better over other higher charging mutual funds.

If you have other investments outside of your Thrift Savings Plan, like an IRA or taxable investments, don't consider them alone. You have to take into account all of your investments to properly diversify and make appropriate decisions so that you can make the most of your investments.

I'm a HUGE fan of the Federal Governments Federal Thrift Savings Plan, and if you can contribute to it, you should. Not only is it simple, but it is cheap. Studies show that the two largest things that you can control which determines how big of a nest egg you are able to accumulate, and they are how much you save and expenses. Well, you can control how much you are going to put into your retirement accounts. And in regards to the TSP, you can control how much of your account you are going to lose to expenses. You have taken control over two of the largest determinants of saving for a comfortable retirement.

In the end, contribute to retirement plans. If you work for the Federal Government or are in the military, then take advantage of the Thrift Savings Plan because it is a GREAT deal. Cheap expenses, investment options, tax advantages all add to great retirement plan, unless you happen to have millions of dollars to invest already.



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