What is "TSP"?

I get this question all the time believe it or not. If you have never had an employer sponsored retirement savings plan, or even if you have, it can be confusing.

Many employers in this country provide a vehicle for employees to save for retirement. In the private sector the most common one is a 401(k). A Thrift Savings Plan, is just a "401(k)" for federal employees. This vehicle allows for employees to save pretax money for their retirement.

There are some benefits to saving money pretax. First of all, it reduces your taxable income while you are working. For those that are farther up the corporate ladder, so to speak, this can be helpful. Secondly, the money inside of this account grows tax deferred until your retirement. This means you will not have to pay taxes on the gains inside of your TSP until you withdraw the money. Once you start withdrawing money from the TSP, those distributions will be taxed as ordinary income, not earned income (more on taxes in another post).

Unlike many 401(k)s, which typically offer a large basket of mutual funds, the TSP is limited on the different funds offered. This can be somewhat restrictive as the ways to allocate those funds inside your TSP are limited. Sometimes, if you are close to retiring, it could make sense to find alternatives to the TSP that allow more options for designing an investment portfolio more geared toward your retirement goals.

Just like the private sector there are limits on how much you can contribute to your TSP every year. In 2020, the contribution limits for workers under the age of 50 is $19,500 for the year. For workers over the age of 50 there is a "catch up" provision that allows up to $26,000 per year. The TSP also provides a "match" for contributions. This means the government will match dollar for dollar up to 3% of your contribution and fifty cents on the dollar for contributions over 3% up to 5%. If you are not contributing at least 5% to get these government match, essentially free money, you could be making a huge mistake.

As I'm sure you know by now, federal employees are offered a FERS annuity/pension payment upon retirement. What you may NOT know is that payment will be a fraction of your current income based on your age, years of service and your working salary. Depending on when you retire, you may receive either a Social Security supplement or your actual Social Security benefit. Sometimes both of these sources of income are enough for people in retirement. Sometimes they are not. When those sources are NOT enough, enter the TSP...

When I review federal employees' retirement plans, it is common to see gaps in the DESIRED income in retirement and the ACTUAL income. If you have money saved in the TSP, those funds can be used to bridge gaps in income to maintain the lifestyle you desire. This takes careful planning to make sure your investments match the goals in your retirement plan.

Say for instance, the income you desire for retirement is around $6000 per month. But between your FERS annuity (or if you are an old timer...BRS) and Social Security you are only seeing $5000/month, your TSP funds could possibly be used to bridge that gap. Or perhaps you can use your TSP to take the place of your Social Security payment until it grows to an amount that fits your plan. Tons of options exist for putting the pieces of the puzzle together but like I always say...have a plan. Matt