Thrift Savings Plan (TSP) Basics
The Thrift Savings Plan (TSP) has to be one of the best reasons going for working for the federal government. Well, that and some of the jobs have nice perks like:
- Instilling fear in your fellow citizen just by your presence (IRS auditor)
- Getting to blow stuff up (Military)
- Deciding how long people will spend locked up in jail (Federal judge)
The TSP is the gub’ment’s version of the 401(k) or 403(b). Only it’s way better. To wit,
- You can contribute any percentage of your pay, regardless of your income, up to the federal max ($15,500 in 2007).
- Depending on the situation, there is sometimes a match.
- The contributions are pre-tax, just as in a 401(k), so contributing reduces your tax bill.
- The investment selections are superior to just about any private plan I’ve seen.
Investment options
Where the TSP really shines is in its investment options. There are really two categories - Lifestyle and regular funds.
A lifestyle fund is one that changes the underlying investments gradually as you approach retirement. So as you age, your exposure to stocks decreases. The lifestyle funds are just like the better versions of the same in the private sector. For example, the 2040 fund investments are just about perfect, as far as I’m concerned. It has 60% in a total market stock index fund, 25% in an international index fund, 10% in a bond fund, and 5% in a cash equivalent.
The funds that underlie the lifestyle funds are the same ones you can invest in directly. That way, if you don’t like the lifestyle fund target mix, you can do it yourself.
There are two great things about the regular funds. First, they have the most awesome management fee around - 0.03%. That’s right, on a $10,000 investment you’d pay $3 in fees per year. That’s lower than even Vanguard’s ETFs. Unreal.
The second great thing about the funds is they’re simple. There are only five of them, so even novice investors aren’t going to be overwhelmed with options. They’re all also index funds. Since it’s been proven over and over that index funds beat actively managed funds over the long haul, that’s a good thing.
Other notes
Another thing to know about the TSP is that it’s portable. That is, you can roll it over when you leave government service. You can also roll over previous qualified plans into it. That keeps all your investments together, and since the funds are so great, I recommend that.
Normally, National Guard and Reserve members can’t contribute to the TSP. However, if you’re called to active duty, you can. That’s what I did when it happened to me right after 9/11. I knew about the program and enrolled. I was able to save, like, $3,000 in addition to my 401(k) that year (which is probably against the rules, but since I’m one of probably three people who’s ever done it, I’m not too concerned). Once I left active duty, I rolled it over into an IRA.
So what does all this boil down to? If you’re employed by the federal government, you owe it to yourself to invest in the TSP as much as you possibly can. If you’re unsure how to invest, pick the lifestyle fund closest to your target retirement date. Then, when you retire, you can sleep on piles of money, free from worry.
November 8th, 2007 at 9:07 am
Must be nice… So far I’m not at a full-time job with a 401k so my tax-advantageous investing is limited to the $4,000 I put in my Roth each year…lookig at all that money in savings is getting a bit depressing, it would definitely be nice to throw it in something like the TSP.
November 9th, 2007 at 7:35 am
The TSP is a great retirement vehicle for those who are eligible. I saved a bit when I was in the USAF, and decided to leave my funds in there after I separated. I decided it would be too difficult to find another plan that could manage the funds so cheaply! (I also had some tax free earnings from a deployment to a tax free zone, so I will be able to withdraw a portion of my earnings tax free when I reach retirement age).
November 9th, 2007 at 7:44 am
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November 10th, 2007 at 6:38 am
TSP is bad because military cannot get any portion of matching, unlike the rest of the government who are eligible if they are FERS for not only FERS match but agency match as well. I’m not sure how the military got the short end of the stick on this one.
Flip side, is that if you are military and are in tax exclusion zone, your contributions remain tax free as well as the increased $45k contributions max. Granted the rest of the government cannot get tax exclusion and the increased contribution max. I would rather have the FERS match and agency match over being able to contribute more since you aren’t always going to be in tax exclusion zone.
Yup, they are simple and the funds are very expansive in their inclusion of lots and lots of different stocks. Let’s just hope the government doesn’t botch TSP where it goes bankrupt and tries to go with sexier funds rather than the boring funds that they provide.
November 10th, 2007 at 8:54 am
[…] Personal Finance - Thrift Savings Plan (TSP) Basics. This is a great primer for the TSP, which is similar to a 401(k) plan for government employees and […]
November 12th, 2007 at 6:29 pm
@Tim: The reason the military does not receive matching funds is because, unlike the civilians, the military members get a pension after 20 years of service with continued medical, dental, BX, & commissary benefits et al. Actually the services have been authorized to provide matching funds at their discretion such as part of a reenlistment bonus, etc. Combined with the military retirement pension, the TSP is a great opportunity to enhance a member’s long term retirement plan.
November 13th, 2007 at 8:25 am
@ Tim & Jason - I believe I read that new Army recruits are being offered a match for enlisting, just as Tim says. I can’t imagine that’s too much of a draw for an 18 year old considering joining the Army though.
November 13th, 2007 at 2:49 pm
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February 3rd, 2008 at 10:19 am
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March 22nd, 2008 at 2:41 pm
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