Going through your retirement plan documents might not be the most exciting thing to do—you might say it’s as thrilling as watching paint dry. But your retirement benefits are a big part of your overall job perks and pay, so it’s worth understanding what you’re working with.
Over 80% of employees say that retirement benefits and savings are at the top of their list when it comes to their benefits package. Clearly, retirement perks matter a lot to most workers, but many folks don’t really get how to make the most of their retirement benefits.
Figuring out how to get the most from your employee benefits can be a real puzzle. Not all plans are the same, and deciphering the fine print and all those little details can be confusing—to say the least. The Thrift Savings Plan (TSP) for federal employees is no exception. Like a 401(k), the TSP is a great way to stash your earnings for retirement. Here are some tips on how to make your TSP work for you.
The Basics: How a Thrift Savings Plan Works
Just like a 401(k), a TSP offers participants the opportunity to divert some of their income into a defined contribution program. For federal employees, the government contributes money an employee designates into a retirement account on their behalf.
There are both traditional TSP and Roth TSP accounts available. Having a traditional TSP means that your contributions, employer match, and investment growth are all pre-tax. When you make a withdrawal down the road, the taxes will be due based upon the applicable tax rate at the time you take the money out.
Roth TSP accounts are post-tax, so all contributions are taxed as income at the time the contributions are made. The benefit, however, is that no tax will be due at the time you withdraw on either your contributions or your growth. It should be noted that all employer matches can only be made in a traditional account. This will result in having both a Roth and a traditional account open if you choose to make contributions into a Roth.
How Do Contributions Work?
The contribution limit for the TSP is $23,000 in 2024, with a $7,500 catch-up contribution available for employees over age 50. RMDs start at age 72 for traditional versions of both account types, though the TSP allows you to sidestep this if you haven’t yet retired from your federal employment.
Like many employers, the plan offers a match, up to 5% when an employee also contributes 5% (a full match on the first 3%, and a 50% match on the last 2%). This is in addition to the automatic 1% contribution your agency makes on your behalf each pay period. For this reason, make sure you change your automatic deduction to 5% to take full advantage of this benefit.
Source: Thrift Savings Plan, https://www.tsp.gov/making-contributions/contribution-types/
You become vested after either two or three years, depending on which branch of the government you work for.
What About My Plan Options?
One stark contrast we see between 401(k) accounts and the TSP is the wide variety of investment options available to most 401(k) plans, versus the slim choices available to the TSP. The TSP offers significantly fewer investment options than the average 401(k) plan. While stable and typically very conservative, the lack of options may leave some employees feeling like they have a lack of control over their portfolios.
More recently, the TSP has started offering mutual funds as a way to expand the available investment options. However, there are additional costs that may make mutual funds less attractive to the average TSP investor. For instance, you’ll need to:
- Maintain a $40,000 minimum balance
- Make a minimum initial investment of $10,000
- Pay a $55 annual administrative fee
- Pay a $95 annual maintenance fee
- Pay a $28.75 per-trade fee
- Pay other fees and expenses specific to the mutual funds you choose
As with every investment, there are trade-offs no matter what you choose. Sticking with the traditional TSP investment options (index funds and lifecycle funds) can offer a much lower cost alternative to the TSP mutual funds and other investments offered through 401(k)s. In fact, 401(k)s can often have high and sometimes hidden maintenance and administrative fees. With relatively low fees, a TSP participant often enjoys the opportunity to keep more of their contributions growing for their retirement.
Make the Most of Your TSP
This article covers the basics of a TSP, but it’s important to know that these plans are complex. To really understand all the nuanced details and make the most of your options, it’s wise to have an experienced professional to guide you through it.
As a dedicated financial advisor, my goal is to provide you the best value possible. Let’s tailor your TSP to fit your specific needs and align them with your financial goals. To get the ball rolling, email me at jim@glhcfinancial.com or call 916-967-3208 to see how I can help you pursue your ideal financial future.
About Jim
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources and knowledge to help his clients experience simplicity and clarity in their financial lives. Jim spent more than 20 years working for GE Financial Advisors, both in its insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
Jim lives in Folsom, California, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities like kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.