What You Don’t Know (But Should) About Your Thrift Savings Plan


&l;p&g;&l;img class=&q;dam-image shutterstock size-large wp-image-682973491&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/682973491/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Shutterstock

&l;span style=&q;font-weight: 400;&q;&g;Many articles about retirement planning focus on 401(k)s, but federal employees and members of the military save for retirement with a different kind of account: the Thrift Savings Plan, or TSP. &l;/span&g;

&l;span style=&q;font-weight: 400;&q;&g;In some ways, TSPs function similarly to 401(k)s. You make contributions, and your employer may offer a match. The annual contribution limit is also $18,500, with a $6,000 additional catch-up contribution for anyone 50 or older. &l;/span&g;


&l;span style=&q;font-weight: 400;&q;&g;Also like many 401(k)s, TSPs offer both traditional and Roth options. In a traditional TSP, you make pre-tax contributions and pay tax on withdrawals of your money in retirement. If you elect the Roth option, you would contribute post-tax income and would not pay tax on withdrawals. &l;/span&g;

&l;span style=&q;font-weight: 400;&q;&g;You can have both a traditional and Roth TSP at the same time, and there&a;rsquo;s an interesting caveat: the government&a;rsquo;s matching contributions can only be made into a traditional TSP, so even if you only contribute to a Roth TSP, you will still have both types of accounts (and the added benefit of some tax diversification). &l;/span&g;


&l;strong&g;How TSPs Work For Different Kinds Of Employees&l;/strong&g;

&l;span style=&q;font-weight: 400;&q;&g;Your TSP account may have some slight differences, depending on if you&a;rsquo;re in the military or a civilian government worker:&l;/span&g;

&l;/p&g;&l;h3&g;&l;span style=&q;font-weight: 400;&q;&g;Federal Workers&l;/span&g;&l;/h3&g;

&l;b&g;Federal Employees&s; Retirement System (FERS): &l;/b&g;&l;span style=&q;font-weight: 400;&q;&g;Federal civilian employees who were hired on or after January 1, 1984, are FERS employees. FERS employees hired after July 31, 2010, are automatically enrolled in a traditional TSP, and 3% of their basic pay is deducted and deposited into the account unless you elect to change or stop your contributions. FERS employees hired before August, 1, 2010, &l;/span&g;&l;a href=&q;https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/establishingAccount.html&q; target=&q;_blank&q;&g;&l;span style=&q;font-weight: 400;&q;&g;have TSPs that get a 1% contribution from their agency&l;/span&g;&l;/a&g;&l;span style=&q;font-weight: 400;&q;&g;, and they can choose to contribute more as well. &l;/span&g;


&l;b&g;Civil Service Retirement System (CSRS): &l;/b&g;&l;span style=&q;font-weight: 400;&q;&g;This is the retirement system for federal civilian employees who were hired before January 1, 1984. CSRS employees&a;rsquo; accounts are established by your agency after you make a contribution election.&l;/span&g;

&l;h3&g;&l;span style=&q;font-weight: 400;&q;&g;Military&l;/span&g;&l;/h3&g;

&l;span style=&q;font-weight: 400;&q;&g;Because 80% of uniformed military members don&a;rsquo;t remain in the military for the 20 years needed to be eligible for a pension, many were walking away from their service with nothing for retirement. The Blended Retirement System (BRS) was enacted to change that. It allows you to choose a pension, a TSP, or both, and the best option for you depends on your current years of service.&l;/span&g;


&l;span style=&q;font-weight: 400;&q;&g;Anyone entering the military now is automatically in the BRS. You automatically get 1% of your base pay contributed to a TSP, and you can contribute another 4% to get a 5% total match. You&a;rsquo;d still get a pension if you complete 20 years of service, but it&a;rsquo;ll be a reduced one.&l;/span&g;

&l;span style=&q;font-weight: 400;&q;&g;If you have more than 12 years of service, the pension alone may be the better bet, as the 5% match on a TSP won&a;rsquo;t offset the higher pension you&a;rsquo;d get for having no TSP at all.&l;/span&g;


&l;span style=&q;font-weight: 400;&q;&g;The gray area is service members with 8 to 12 years of service. Whether or not you stay in the old system or switch to the BRS depends on your personal situation.&l;/span&g;

&l;strong&g;Investment Choices For Your TSP&l;/strong&g;

&l;span style=&q;font-weight: 400;&q;&g;You have a selection of &l;/span&g;&l;a href=&q;https://www.tsp.gov/InvestmentFunds/index.html&q; target=&q;_blank&q;&g;&l;span style=&q;font-weight: 400;&q;&g;five index funds, or several lifecycle funds&l;/span&g;&l;/a&g;&l;span style=&q;font-weight: 400;&q;&g; that are made up of combinations of those five index funds. While these are far fewer investment options than many employers offer in their 401(k)s, choosing between a smaller number of options is often less confusing! &l;/span&g;&l;span style=&q;font-weight: 400;&q;&g;


&l;/span&g;

&l;ul&g;&l;li style=&q;list-style-type: none;&q;&g;

&l;ul&g;&l;li style=&q;font-weight: 400;&q;&g;&l;b&g;G Fund: &l;/b&g;&l;span style=&q;font-weight: 400;&q;&g;The Government Securities Fund is invested in, as its name states, U.S. government securities. This offers the lowest volatility, and you can earn interest income without fear of losing your principal investment.&l;/span&g;&l;/li&g;

&l;li style=&q;font-weight: 400;&q;&g;&l;span style=&q;font-weight: 400;&q;&g;&l;b&g;F Fund: &l;/b&g;&l;span style=&q;font-weight: 400;&q;&g;The Fixed Income Fund is invested in government, corporate, and mortgage-backed bonds and aims to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. This fund offers low to moderate risk.&l;/span&g;


&l;/span&g;&l;/li&g;

&l;li style=&q;font-weight: 400;&q;&g;&l;b&g;C Fund:&l;/b&g;&l;span style=&q;font-weight: 400;&q;&g; The Common Stock Index Fund matches the S&a;amp;P 500, which is comprised of medium and large U.S. companies. This fund offers moderate risk.&l;/span&g;&l;/li&g;

&l;li style=&q;font-weight: 400;&q;&g;&l;b&g;S Fund: &l;/b&g;&l;span style=&q;font-weight: 400;&q;&g;The Small Capitalization Stock Index Fund is slightly riskier because it invests in small and medium U.S. companies that aren&a;rsquo;t in the C Fund. This fund matches the Dow Jones U.S. Completion Total Stock Market Index.&l;/span&g;&l;/li&g;


&l;li style=&q;font-weight: 400;&q;&g;&l;b&g;I Fund: &l;/b&g;&l;span style=&q;font-weight: 400;&q;&g;The International Stock Index Fund matches the performance of the MSCI EAFE (Europe, Australasia, Far East) Index, comprised of stocks of more than 20 developed countries. This fund is more volatile than the C Fund.&l;/span&g;&l;/li&g;

&l;/ul&g;&l;ul&g;&l;li style=&q;font-weight: 400;&q;&g;&l;b&g;L Funds: &l;span style=&q;font-weight: 400;&q;&g;Similar to target-date or lifecycle funds, you can select an L Fund based on your retirement time horizon, and the fund will gradually shift from aggressive to moderate to conservative as you get closer to retirement. If you have a retirement age in mind, select the fund that targets the year closest to when you turn that age.&l;/span&g;&l;/b&g;&l;/li&g;


&l;/ul&g;&l;/li&g;

&l;/ul&g;

A big benefit of TSP fund options? They all have some of the lowest expense ratios around — less than 40 cents for every $1,000 you invest. This is huge because even a fraction of a percent increase to a fund&a;rsquo;s expense ratio can mean significantly lower retirement savings in 20 or 30 years.

&l;span style=&q;font-weight: 400;&q;&g;If you don&a;rsquo;t opt for an L Fund, you can create your own combination of the five other funds. It&a;rsquo;s important to consider your investment options carefully and make the elections that are right for you. The default fund allocations may not match your particular goals. &l;/span&g;


&l;span style=&q;font-weight: 400;&q;&g;If you enrolled in a TSP on or after September 5, 2015, your contributions are automatically deposited into the L Fund targeted toward the year you turn 62. If you enrolled before that date, your contributions are deposited into the G Fund, which may not be aggressive enough if you have a long time horizon. &l;/span&g;

&l;strong&g;Matching Contributions&l;/strong&g;

&l;span style=&q;font-weight: 400;&q;&g;BRS members and FERS employees receive an automatic contribution of 1% of their base pay to their TSP, whether or not they contribute. From there, you&a;rsquo;d get a match on your additional contributions up to 5% of your salary. &l;/span&g;


&l;span style=&q;font-weight: 400;&q;&g;The 1% automatic contribution vests after three years for most FERS employees, and after two years for BRS and some FERS employees. The match on your contributions does not have a vesting requirement.&l;/span&g;

&l;strong&g;Picking Beneficiaries&l;/strong&g;

&l;span style=&q;font-weight: 400;&q;&g;It&a;rsquo;s essential to select beneficiaries for your TSP, and to keep that list of beneficiaries updated in the event you have children, get a divorce, etc. &l;/span&g;

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&l;span style=&q;font-weight: 400;&q;&g;If there&a;rsquo;s less than $200 in your TSP when you pass away, your beneficiary will receive that money. Over $200, the money remains invested and a beneficiary participant account will be established in their name. &l;/span&g;

&l;strong&g;Where Should You Begin?&l;/strong&g;

&l;span style=&q;font-weight: 400;&q;&g;If you&a;rsquo;re eligible to participate in a TSP, I highly recommend you contribute at least enough to get the 5% match. &l;/span&g;

&l;span style=&q;font-weight: 400;&q;&g;You can also contribute up to $5,500 per year to a Roth IRA &l;/span&g;&l;a href=&q;https://www.rothira.com/2017-roth-ira-limits-announced&q; target=&q;_blank&q;&g;&l;span style=&q;font-weight: 400;&q;&g;if you qualify&l;/span&g;&l;/a&g;&l;span style=&q;font-weight: 400;&q;&g;. After that, continue to take advantage of the ability to lower your taxable income by contributing up to the annual maximum of $18,500 to your TSP.&l;/span&g;

&l;span style=&q;font-weight: 400;&q;&g;If you have money available for further investing, you can set up a separate after-tax brokerage account.&l;/span&g;