For U.S. Government Employees, the Thrift Savings Plan Can Provide a Fantastic Means of Saving for Retirement.
When it comes to retirement, there are a number of options available – and one of them is a 401(k) if you work for private corporation. If you don’t work in the private sector and are a government employee it’s important to note that you may have another option available to you for your retirement savings and investing: the Thrift Savings Plan.
The Thrift Savings Plan (TSP) was established in 1986 by Congress as a part of the Federal Employees’ Retirement System Act and was implemented as an alternative for U.S. Federal government employees who want to participate in a 401(k)-type savings and investment plan. Also offered to members of the uniformed services (Ready Reserve, included), it offers the same types of savings and tax benefits as the 401(k), as your contributions grow tax free until retirement. Plus, just like the private corporations and their 401(k) plans, the amount you receive from your TSP account upon retirement is largely dependent on the contributions you, and/or the agency you were employed under (if applicable), have deposited into your account while employed (which makes it a defined contribution plan).
How The Thrift Savings Plan Works
The Thrift Savings Plan is structured as a means of supplementing and/or complimenting any Federal, Civil, or military retirement package. Administrated by the Federal Retirement Thrift Investment Board (FRTIB), it is an independent government agency that works in tandem with private companies to provide proper administrative fluidity, record keeping accuracy, and call centers for support. While the administrators do have call centers to assist you, your primary contact is still the employer you work for.
Those who participate in a TSP plan have limitations to how much they may place in their accounts annually. For 2014, the contribution limits are $17,500 for elective deferral limits, $52,000 for annual addition limits (contributions or matches from employers in a single calendar year), and $5,500 additional catch-up contributions for those ages 50 and over. In addition, you may roll over any other traditional IRAs or 401(k) plans you have into your TSP account, to take advantage of their low annual fees and their versatile, but simple, allocation options.
As with 401(k) plans, your money is spread among different funds that range in risk and yield. But, while 401(k) plans generally give you the option to be more conservative (low risk) or aggressive (high risk) by giving you a choice of well-known funds, TSP investing revolves around just five index funds instead. These five index funds include:
- (1) The C fund, which invests in larger companies and corporations
- (2) The S fund, which focuses on small companies
- (3) The I fund, which invests in international firms
- (4) the F fund, which concentrates on fixed- income investments
- (5) the G fund, which involves low-risk government securities.
Here’s the catch: if you do not actively choose your TSP allocations, they will be placed into the “default” G fund where you will gain interest on your contributions, but you will not realize the kind of gains and exponential growth that you could see from other options.
TSP Investing: How to Maximize Your Retirement Package
While gaining interest on your money seems like a safe option, particularly when you see the volatility of the stock market in the short-term, most people are investing for the long-term. Traditionally, the U.S. stock market has been one of the safety and most lucrative ways to invest retirement money. Plus, if since you are only contributing only a small amount from each paycheck, the cost average of your investment will even itself out over the long haul, compensating for any short-term market volatility.
So, how do you maximize the money you will receive at retirement?
As mentioned earlier, simply placing your money into a G fund isn’t something most investment advisors will recommend, particularly if you are starting young. Many noted financial advisors suggest you place a majority in a C fund, with the rest going into S and I funds to maximize results.
Ultimately, it is the individual choice as to what he is comfortable with when seeking returns and their corresponding risk – but staying too conservative can cost you a lot of money over the course of a few years.
Are There Really Any Differences Between My 401(k) and a TSP Account?
Currently there aren’t that many differences between a 401(k) account and a TSP account, contribution amounts are the same, and aside from the way you are able to choose you investments, and the fees associated with the management of the accounts, you are pretty much on the same level of playing field. However, the indexes for TSP allocations can be a real positive for those not familiar with the stock market, or those who don’t want to keep up with which of the more recognizable funds are performing. Additionally, If you aren’t keeping track of the fees associated with your 401(k), you may be shocked to find out that you might be paying double than what your TSP account would be charging.
Investing for retirement through the Thrift Savings Plan is a solid means of ensuring you have the nest egg you need when you stop working. When comparing private 401(k)s to the TSP, most people find that investing in the TSP is a better option.