Invest in retirement – and do it early and often. That’s great advice, but what if you work for the government and don’t have access to a plan like a 401(k)? You can still grow your wealth for the future with the help of the thrift savings plan (TSP).
What is a TSP?
The federal thrift savings plan was created in 1986 as part of the Federal Employees’ Retirement System Act.
Employees who work in the private sector have access to a 401(k), which offers a way for you to save for the future. The point of the TSP is to provide federal government employees with similar benefits.
Like a 401(k), the TSP is a defined contribution plan. You decide how much you want to put into the plan, the money is invested and potentially grows over time. Later, you can withdraw the money for living expenses during retirement.
You can contribute up to $18,000 to your TSP in 2017. This is the same amount workers can contribute to a 401(k) in the private sector. Contributions are related to inflation, and each year the IRS reviews the situation and decides whether to increase the contribution limit.
The federal thrift savings plan is also a tax-advantaged retirement plan; that can mean more efficient growth for your money over time.
Benefits of a thrift savings plan
Participating in the TSP can be a good way for you to start saving for the future if you work for the federal government. Here are some benefits of the TSP:
With the federal thrift savings plan, you can decide whether you want your contributions to be tax-deferred or grow tax-free. All your contributions are taken out of your paycheck automatically.
If you get a traditional TSP, the money is taken out of your paycheck before taxes. This means you end up with immediate tax savings. You can put that money to work on your behalf to grow more efficiently.
On the other hand, you can also make Roth contributions to your TSP. Your money will go into your account after you pay taxes. Even though you don’t see immediate savings, you won’t have to pay taxes on the money you withdraw. This can mean huge tax savings down the road.
Deciding which type of account to open requires careful thought into your situation and what you think will happen with your taxes.
As with the 401(k), it’s possible to enjoy an employer match as part of the thrift savings plan. Whether or not you end up with a match depends on your agency. However, if your agency does offer a match, it makes sense to take it. An employer match is free money that goes into your retirement account. The more you can boost your contributions, the better off you are.
Agencies make automatic contributions to your TSP. This automatic system ensures that you receive a contribution equal to one percent of your pay from the agency. This happens regardless of whether or not you make your own contribution and doesn’t come out of your pay. (It’s a good idea to make contributions on your own, and potentially receive a match.)
As with other tax-advantaged retirement accounts, it’s possible to make catch-up contributions if you are at least 50 years old. The IRS reviews cost of living and inflation each year to make changes. In 2017, that catch-up is $6,000.
Easy to move into other retirement accounts
Because the federal thrift savings plan is a tax-advantaged account similar to a 401(k), it’s easy to move assets between accounts. You can move money from non-government tax-advantaged accounts into your TSP. It’s also possible to move your TSP assets into a 401(k) or IRA.
In order to make it work, it’s important to be aware of the rules that govern rollovers between traditional and Roth accounts, since the tax implications are different. However, moving money from traditional to traditional or Roth to Roth is fairly straightforward.
Investment choices with the TSP
You have different investment choices with the TSP. The choices include funds with low expense ratios. There are lifecycle funds, government securities fund, fixed income index fund, common stock index fund, small cap index fund, and an international stock index.
What you choose depends on your risk tolerance and future goals. Each fund offers different potential returns for the future and can help you figure out what will work best for you. Research your options to figure out which asset allocation is going to help you best reach your goals and increase your chances of a comfortable retirement.
Investing in an IRA when you have a TSP
When you are enrolled in a thrift savings plan, you can still contribute to an IRA. However, there might be rules reducing how much you can contribute. Your financial situation might mean that the amount you contribute to a Roth TSP can reduce the amount you are allowed to contribute to a Roth IRA.
Before you get too far into investing in an IRA in addition to your TSP, review your situation and consider speaking with a financial professional who can help you figure out the best move for you.
It’s always better to invest as much as you can for retirement, no matter how you do it.
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