What Exactly Is a Thrift Savings Plan?

TSPs are retirement investment programs available only to federal employees and uniformed military members, including the Ready Reserve. It is a defined-contribution (DC) plan that provides government employees many of the same benefits as private-sector workers.

The Thrift Savings Plan was established as part of the Federal Employees Retirement System Act in 1986. The TSP did it to allow federal employees to invest in a tax-advantaged retirement account compared to a 401(k) plan.

In case you are a Federal Employees Retirement System participant, you can save in a TSP while receiving a FERS retirement annuity and Social Security payments. The TSP supplements a CSRS annuity or military retirement pay if you are covered by the Civil Service Retirement System (CSRS).

What Is the Process of a Thrift Savings Plan?

Only federal employees who desire to save money for retirement can use the TSP. These plans’ main goal is to supplement any annuity benefits you could get through the CSRS or the FERS system with retirement income. 

There is no waiting time when you start working for the government; you can start making payments to a TSP immediately. Even if you aren’t contributing anything from your paychecks to the plan, you can start getting the automatic 1% match.

The contribution cap is $22,500 for 2023 (increased from $20,500 in 2022), regardless of your selected TSP type or contribution structure. Catch-up contributions for workers over 50 will increase to $7,500 in 2023 from $6,500 in 2022.

You must work for the federal government or be a military member to be eligible to contribute to a TSP account. The TSP is often available to anyone working for the federal government, but if you need clarification, check with your benefits office.

A traditional or Roth TSP designation is available. Traditional TSPs are taxed in the same manner as conventional IRAs. Contributions are made with pre-tax money. Therefore, taxes must be paid when the funds are withdrawn.

How Much Can I Deposit Into a Thrift Savings Account?

The contribution limit for your TSP account in 2023 is $22,500. You can contribute an additional $7,500 per year as a catch-up payment if you are 50 or older.

If you wind up contributing to your TSP more than the IRS allows, you can request a return of those payments. To receive a refund of excess deferrals, fill out Form TSP-44. The management of the TSP must receive your request by March 15 of the year following which you made the excess contributions.

Is a TSP the same as a 401(k) plan?

They are not identical, although they are structured identically and have the same contribution limitations. A TSP is what the federal government provides in place of a 401(k), which is the sort of plan provided by private employers. You can have both if you have worked for both the government and a private firm. However, the overall contribution to these retirement plans must be within the Internal Revenue Code’s annual contribution limits.

Are There Any Penalties for Using Thrift Saving Plans?

The TSP is subject to the same tax laws as standard or Roth IRAs. That implies you could face a 10% early withdrawal penalty if you take your savings out of the plan before 59 1/2. You may also be required to pay taxes on earnings withdrawals.

Is a TSP a Better Investment Than an IRA?

TSPs and IRAs both have advantages. With a TSP, you can contribute significantly more yearly, receive federal government matching contributions, and pay lower investing expenses. With an IRA, you have better control of your money and no withdrawal limits when you retire. Borrowing from a TSP account (up to $50,000) is permitted while borrowing from an IRA account is not.

It is similar to private sector programs such as the 401(k) but with fewer options and flexibility. The restrictions are in place to guarantee that employees can make sound decisions regarding their retirement investments. They can, however, utilize some of the cash in the account to invest in approved mutual funds as they see fit, allowing them investment freedom if desired.