This post will cover the basics of the Thrift Savings Plan (TSP). It is a primer for future (and previous) posts that will cover more advanced topics.
The TSP is a retirement savings plan that allows contributions and investments to grow in a tax-deferred or tax-exempt (Roth) account. Tax-deferred means that you do not have to pay income taxes on current contributions but taxes will be paid later (deferred) when money is withdrawn from the TSP in retirement. Tax-exempt means that you forego the current tax benefit on current contributions but will owe zero taxes on future withdrawals in retirement. The TSP is available to employees of the federal government and was made available to the military in the year 2000. Normally, contributions are limited to $18,000 per year (for 2016) unless the plan participant is age 50 or older in which case a $6,000 additional “catch-up” amount can be added to the normal contribution limit. Normally, contributions are set up as a deduction to participants regular pay.
The TSP consists of five basic funds:
- G Fund
- F Fund
- C Fund
- S Fund
- I Fund
The following table is taken directly from the tsp.gov website and helps describe the different funds within the plan (the fund names are hyperlinked to the TSP website for further information on the different funds):
|G Fund||F Fund*||C Fund*||S Fund*||I Fund*|
|Description of Investments||Government securities (specially issued to the TSP)||Government, corporate, and mortgage-backed bonds||Stocks of large and medium-sized U.S. companies||Stocks of small to medium-sized U.S. companies (not included in the C Fund)||International stocks of more than 20 developed countries|
|Objective of Fund||Interest income without risk of loss of principal||To match the performance of the Barclays Capital U.S. Aggregate Bond Index||To match the performance of the Standard & Poor’s 500 (S&P 500) Index||To match the performance of the Dow Jones U.S. Completion TSM Index||To match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index|
|Risk||Inflation risk||Market risk, Credit risk, Prepayment risk, Inflation risk||Market risk, Inflation risk||Market risk, Inflation risk||Market risk, Currency risk, Inflation risk|
|Volatility||Low||Low to moderate||Moderate||Moderate to high – historically more volatile than C Fund||Moderate to high – historically more volatile than C Fund|
|Types of Earnings||Interest||Change in market prices and interest||Change in market prices and dividends||Change in market prices and dividends||Change in market prices, changes in relative value of currency and dividends|
|2015 Net Administrative Expenses||0.029%||0.029%||0.029%||0.029%||0.029%|
There are also Lifecycle or “L” Funds. L Funds are made up of the five funds already mentioned above. L Funds target a retirement date which is used in the name of the L Fund. For example, L 2020 is a fund targeting the year 2020 for retirement. The closer an L Fund moves towards its target date, the more the fund shifts towards the G and F Funds and away from the C, S and I Funds. Once the L Fund reaches its target date it rolls into the L Income Fund. Currently (as of 25 September 2016), there are five L Funds and their current compositions are laid out in the table below.
|Fund Name||G Fund||F Fund||C Fund||S Fund||I Fund|
The TSP offers participants an inexpensive retirement savings vehicle at only 29¢ annually per $1,000 investment. That is difficult to beat. Another feature of the TSP is the ability to borrow the money in your plan, though, I would caution most people against doing so. If you borrow you will miss out on any gains you would have otherwise made had you left your plan intact. It’s true that the market could decline while you borrow money, but if you can time the markets your name is Nostradamus and you wasted time reading this post because you already knew what I was going to say. When you do borrow against the TSP, you have to pay a $50 processing fee and you pay an interest rate to yourself (which is definitely better than paying it to someone else).
Withdrawals are similar to other retirement savings plans. Withdrawing prior to age 59.5 can result in tax penalties and income taxes will be payable on any deferred contributions and gains. The TSP will allow you to withdraw in the following ways:
- A specified amount which must exceed $25 per month
- An amount based on the IRS life expectancy tables. This is recalculated annually and is designed to payout over your lifetime.
- Full withdrawal as a lifetime annuity. The TSP can be transformed into a lifetime annuity with a guaranteed monthly payout.
- Combinations of any of the above.
The TSP can also be rolled over into an Individual Retirement Account (IRA) or another employer’s 401k plan when leaving active federal service. I would consult with your financial advisor before doing either one of these.
I think that covers most of the basics about the TSP. It’s inexpensive, simple and easy to diversify with. Overall, I am a big fan of the TSP.
This blog post is for educational purposes only and is not investment advice. Before making any investments consult with your investment advisor.