When it comes to financial planning, there is no “one-size-fits-all” approach. There are many reasons for that, such as financial goals, family dynamics, and time horizon. Another reason why everyone’s financial plan, retirement strategies, and other recommendations are not the same has to do with the fact that not everyone has the same benefits available to them.
If you are a federal employee, you have unique benefits that will make a significant impact on your finances. One benefit in particular, the Thrift Savings Plan (TSP), can be complicated to understand and requires some decision-making on your part. Here’s a breakdown of everything you need to know about the Thrift Savings Plan.
What Is The Thrift Savings Plan?
The Thrift Savings Plan (TSP) is a tax-deferred retirement saving and investment plan that offers federal employees the same type of savings and tax benefits that many private corporations offer their employees under 401(k) plans. By participating in the TSP, federal employees have the opportunity to save part of their income for retirement, receive matching agency contributions, and reduce their current taxes. (1) The TSP is administered by the Federal Retirement Thrift Investment Board.
How Do Contributions Work?
You are automatically enrolled at 3% of your pay, but you can choose to increase or decrease that amount. For 2018, you can contribute up to $18,500, with an extra $6,000 catch-up contribution for those over age 50. (2) The Federal Employee Retirement System (FERS) will also contribute 1% of your basic pay on your behalf. Finally, FERS generously matches your contributions on the first 5% of the pay you contribute. The first 3% is matched dollar-for-dollar, and the next 2% is matched at 50 cents on the dollar. (3) For this reason, make sure you change your automatic deduction to 5% to take full advantage of this benefit.
You become vested after either two or three years, depending on which branch of the government you work for.
What Are My Plan Options?
As with many other types of retirement plans, you can choose to invest pre-tax or after tax. If you choose the Traditional TSP, you will invest pre-tax money but will pay taxes when you withdraw the money in retirement. For the Roth TSP option, you pay taxes on your contributions now but can access the money tax-free in retirement.
If it’s the right choice for your financial situation, you can make contributions to both of these accounts for a combined amount of $18,500 or $24,500, depending on your age. Your government match will be deposited in your Traditional TSP.
Can I Roll Money From Other Accounts Into My TSP?
The Thrift Savings Plan will accept rollovers from other retirement accounts. If you want to move money from Traditional IRAs, SIMPLE IRAs, or eligible employer plans, the funds will be deposited into your Traditional TSP. If you have Roth 401(k), Roth 403(b), or Roth 457(b) accounts, you can move them into your Roth TSP. Unfortunately, Roth IRAs cannot be rolled over into your TSP plan.
What About Fees?
Like most investment accounts, there are fees involved in the management and administration of your TSP. The good news is that TSP fees tend to be much lower than most other plans. The fees you pay will depend on what investments you choose and the balance of your account. This is why many people choose to roll other retirement accounts into the TSP. Updated costs can be found in the TSP newsletters.
What Control Do I Have Over My Investments?
The Thrift Savings Plan offers two choices for investing your money.
This is an investment allocation mix chosen by professionals and includes stocks, bonds, and government securities. They are allocated based on your time horizon for withdrawing the money and are automatically rebalanced.
If you decide to, you can make your own allocation decisions, choosing from any of the TSP investment funds. These include short-term government securities, longer-term fixed-income securities, S&P 500 stocks, small and mid-sized company stocks, and international stocks. If you choose this option, you are responsible for monitoring your account and rebalancing when necessary.
Let Us Help You With Your TSP
Just like any other retirement plan, your choices will impact your future financial situation. At Beacon Wealth Management, we specialize in helping federal employees make the most of their retirement plan. As independent financial advisors familiar with the TSP, we’d like to help you make the right decisions so you can work toward your retirement and financial goals on the fastest and most secure path possible. Contact us today at (304) 626-3900 or firstname.lastname@example.org for a free 60 minute discovery consultation.
John is the founder and owner of Beacon Wealth Management. He specializes in helping entrepreneurs, professional practitioners and retiree redzoners overcome the major financial challenges facing affluent families.
As a trusted and friendly financial partner, John delivers a collaborative client experience that empowers and guides people to reach a greater purpose for their wealth and pursue their financial dreams. He understands the multifaceted set of financial worries people face as they become more successful and get within the retirement redzone.
John is well-regarded throughout the business community for his expertise. He has appeared as an expert guest on the “Brian Tracy Show” and “Hollywood live with Jack Canfield”, is the co-author of the book, Masters of Success with Brian Tracy, is the host of the WDTV News 5 segment, “Solutions 4 Financial Independence,” and has conducted hundreds of educational events on Retirement and Investment Advisory, Tax Reduction and Wealth Transfer Planning. These include many Universities, Federal Employee Organizations, Professional Associations and Large Energy Companies throughout the eastern United States.
With more than two decades of experience, John is credentialed as a Certified Wealth Strategist (CWS), Accredited Investment Fiduciary (AIF), Certified Estate Planner (CEP), Chartered Federal Employee Benefits Consultant (ChFEBC), Professional Plan Consultant (PPC) and Registered Financial Consultant (RFC). He is also a past multi-year member of Ed Slott’s Master Elite IRA Study Group.
A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a Wealth Advisor. Today, he resides with his family in Clarksburg, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-oriented man, he is passionate about giving back to his community, coaching youth sports, landscaping, architectural design and playing racquetball.