The Thrift Savings Plan (TSP) is the government’s answer to the 401(k) for federal workers and the military. It was introduced in 1986 as part of the Federal Employees’ Retirement System Act. The Thrift Savings Plan allows investing in a tax-advantaged retirement account similar to the 401(k) plan. The Thrift Savings Plan contributions can be taken straight out of your paycheck, and you can invest that money in a variety of different funds.
Who Is Eligible for the Thrift Savings Plan?
To be eligible for the Thrift Savings Plan, the federal government must be employed or be a member of the military. If you are unsure if you qualify, contact your benefits office to see eligibility and ask any questions about the Thrift Savings Plan when considering whether you are eligible. If you are in doubt, you should contact a financial advisor specializing in the Thrift Savings Plan.
Traditional and Roth Thrift Savings Plan Contributions
There are two tax contribution options available to choose from when you contribute to your Thrift Savings Plan account, the traditional contribution or the Roth contribution. Here are the differences.
Traditional Thrift Savings Plan Contribution
With the traditional contribution option, your contributions are made with pre-tax dollars. You pay taxes on the income upon withdrawal after retirement, according to your income bracket. This payment of taxes means any gains will be taxed upon withdrawal as well.
Roth Thrift Savings Plan Contribution
Your contributions are made with the Roth contribution option after taxes have been taken out of your paycheck. This option is often viewed as the better option because any gains are tax-free, and you won’t pay any taxes on the money upon withdrawal after you retire.
The Thrift Savings Plan has yearly contribution limits. Search online, or contact your benefits office for the current year limits.
Contribution Matching
Like many civilian companies, your contributions can be matched up to a certain percentage by the agency or branch of service you are in at the time of contribution. Some will match up to 5% of dollar-for-dollar, so if you contribute 5% of your pay, you get a full match. To make the most of this free money, it is suggested that you contribute at least the amount that will be matched.
Contribution Amount
The suggestion is to contribute 15% of your income. However, because there is a set dollar amount yearly contribution limit, you should adjust accordingly. Since your agency or branch will match up to 5%, you should contribute to that amount, because that is free money you don’t want to leave on the table.
What investment funds does the Thrift Savings Plan offer, and which one is right for me?
There are multiple funds to choose from, all with different advantages and disadvantages. To explore these investment funds, which is best for you, consult a professional who understands the Thrift Savings Plan. These funds are not the same for all, and you can invest in more than one fund at a time.
What you need to know now about the Thrift Savings Plan
If you are a federal employee or a uniformed service member, you should be contributing to the TSP. Having a nest egg for retirement is something every financially responsible adult should be focused on, even if getting a later start. You should at least contribute 5% of your income to secure the maximum price match and get that free money added to your future. And most importantly, hire a professional financial advisor that is entirely familiar with the Thrift Savings Plan to help you optimize your investments by choosing the right fund(s) in which to invest.
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