Reading through your retirement plan documents is about as exciting as watching paint dry. But retirement benefits are an important part of your overall employment and pay package, so it’s important to understand the plan you have.
More than 80% of employees said that retirement benefits and retirement savings are top of mind when it comes to their overall benefits package. (1) Retirement benefits are clearly an important factor for most employees, but many people don’t fully understand how to get the most out of their retirement benefits.
Maximizing your employee benefits can be a confusing endeavor. All plans are not created equal, and reading the fine print and absorbing the small details can be a challenge. The thrift savings plan (TSP) available to you as a federal employee is no different. Similar to a 401(k), the TSP is an amazing way to store away your hard-earned money for retirement. Here’s what you need to know to make the most of your thrift savings plan.
The Basics: How a Thrift Savings Plan Works
Just like a 401(k), a TSP offers participants the opportunity to divert some of their income into a defined contribution program. For federal employees, the government contributes money an employee designates into a retirement account on their behalf.
There are both traditional TSPs and Roth TSPs available. Having a traditional TSP means that your contributions, employer match, and investment growth are all pre-tax. When you make a withdrawal down the road, the taxes will be due based upon the applicable tax rate at the time you take the money out.
Roth TSP accounts are post-tax, so all contributions are taxed as income at the time the contributions are made. The benefit, however, is that no tax will be due at the time you withdraw on either your contributions or your growth. It should be noted that all employer matches can only be made in a traditional account. This will result in having both a Roth and a traditional account open if you choose to make contributions into a Roth.
How Do Contributions Work?
The contribution limit for the TSP is $20,500 in 2022, with a $6,500 catch-up contribution available for employees over age 50. (2) RMDs start at age 72 for traditional versions of both account types, though the TSP allows you to sidestep this if you haven’t yet retired from your federal employment.
Like many employers, the plan offers a match, up to 5% when an employee also contributes 5% (a full match on the first 3%, and a 50% match on the last 2%). This is in addition to the automatic 1% contribution your agency makes on your behalf each pay period. (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 About My Plan Options?
One stark contrast we see between 401(k) accounts and the TSP is the wide variety of index options available to most 401(k) plans, versus the slim choices available to the TSP. The TSP offers a scant selection of five investment options, only four of which are index funds. (4) While stable and typically very conservative, the lack of options may leave some employees feeling like they have a lack of control over their portfolio.
That being said, one advantageous difference in favor of a TSP is the generally lower costs associated with investments within the account. 401(k)s can often have high and sometimes hidden maintenance and administrative fees. With relatively low fees, the TSP participant often enjoys the opportunity to keep more of their contributions growing for their retirement.
Beyond the Basic of a TSP
While this article hits most of the highlights, a TSP plan is multi-dimensional. In order to learn about every detail to maximize your opportunities, you need a professional to help you navigate your options.
At Premier Planning Group, we believe in providing value beyond a doubt. Let’s set up your TSP in a way that will work best for your unique situation. To get started, call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit for seven years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
The #1 Advisor and Leadership award is based on production data and is awarded by the Summit Financial Networks region of Cetera Advisor Networks LLC. Brion Harris received the award in 2019, 2020, and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.
The #1 Advisor and Leadership award was based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2015, 2016, 2017, and 2018. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.
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(2) https://www.tsp.gov/making-contributions/contribution-limits/
(3) https://www.tsp.gov/making-contributions/contribution-types/
(4) https://www.investopedia.com/articles/investing/061113/breaking-down-tsp-investment-funds.asp