TSP Overview for Federal Employees
What is the TSP?
Enrollment & Contributions (Employee & Agency)
Does it surprise you that a commonly shared piece of advice among federal employees is to contribute sooner, and more, to your Thrift Savings Plan (TSP)? In general, many people learn rather late that their retirement savings is “deficient.” The reasons for that are varied and personal…didn’t make enough money to save, didn’t realize the importance of savings as part of my retirement income, or didn’t understand how the TSP works…we can help you with that last reason! The Thrift Savings Plan (TSP) may sound like a complicated savings vehicle but let’s break it down for “easy digestion.”
What is the TSP?
The TSP was established by Congress in the Federal Employees Retirement System Act of 1986 as a tax-deferred retirement savings and investment plan. In a sense, the TSP is the federal employee version of private industry 401(k) plans and offers the same types of savings and tax benefits.
Specifically, the TSP is a defined contribution plan which means that the amount of money that you receive from your Plan is dependent upon (defined by) how much you contribute, and your agency if you’re eligible for agency contributions, plus the earnings that you accumulate over time.
The Plan is administered by the Federal Retirement Thrift Investment Board (FRTIB) and the assets of the TSP are held in trust in the Thrift Savings Fund. The FRTIB, an independent government agency, is managed by five presidentially appointed board members and an Executive Director. If you’d like more information about the administration of the TSP, check out Who Administers the TSP?
Am I Eligible for a TSP?
Most employees of the US Government are eligible to participate in the TSP but benefits differ depending on whether you’re FERS or CSRS. In addition to the requirement that you be covered by an eligible retirement system, you must also be actively employed by the Federal government as a civilian employee and in a pay status as a full-time or part-time employee. Yes, uniformed services members are also eligible for the TSP but we’re focused on federal employees for this article. And while you can have both a military TSP account and a civilian TSP account, they will be separate accounts even if you are still eligible to contribute to both.
If you are covered by the Federal Employees Retirement System (FERS), your retirement is made up of three parts - Social Security, the Basic Benefit Plan, and the TSP. If you’re covered by the Civil Service Retirement System (CSRS), the TSP is a supplement to your CSRS annuity. No matter which plan covers you, your TSP is the part of your retirement that you control. You decide how much of your pay to put into your thrift account, how to invest it, and how you want your money paid out when you retire.
TSP Enrollment & Contributions
FERS employees hired after July 31, 2010 are automatically enrolled in the TSP, as are FERS and CSRS employees rehired after that date. Participants automatically enrolled in the TSP on or after October 1, 2020, have 5% of their basic pay deposited in the plan. For participants enrolled in the TSP prior to October 1, 2020, every pay period 3% of your basic pay is deducted via payroll deduction from your paycheck and deposited in your TSP traditional balance. Those enrolled on or after September 15, 2015 have all contributions received by the TSP deposited into your age appropriate Lifecycle (L) fund unless you designate otherwise. If that doesn’t apply to you, it’s likely that your contributions are in the Government Securities Investment (G) Fund unless you indicated otherwise. It is important that you review your TSP statement to make sure your money is being invested the way you desire. And we cover investment options in a separate Tangerine article to help you understand your options.
These regular employee contributions continue unless you make a contribution election to stop or change your contributions. Additional information about starting, changing or stopping your TSP contributions is available here Please note that if you reduce or stop this automatic enrollment, it will impact your Agency Matching Contributions! This is explained below.
Whether or not you contribute to your TSP, your agency contributes an amount equal to 1% of your basic pay every pay period beginning the first time you’re paid – Agency (1%) Automatic Contributions. These automatic contributions are not taken out of your pay and they do not increase the dollar amount of your pay for income tax or Social Security purposes. They are, however, subject to vesting. Vesting means being entitled to keep your Agency 1% Automatic Contributions and their earnings. Don’t worry if you don’t understand vesting, we explain that topic in a separate Tangerine article.
FERS employees hired before August 1, 2010 already have a TSP account that is accruing Agency Automatic (1%) Contributions. To start contributing your own money to your account, and start to receive Agency Matching Contributions, you need to make a contribution election through your agency. This is often accomplished using your agency’s electronic system, such as Employee Express. If your agency does not use an electronic system, you can complete Form TSP-1 and return it to your agency. Only your agency can process your contribution election because it must calculate your contributions and deduct them from your pay.
Thanks…I’ll just stick with the Automatic (1%) Contributions
So you may be thinking, that’s fine, let my agency contribute the Agency Automatic (1%) Contribution and I’ll reduce or stop my contributions so I have more money in my paycheck. While that may be tempting, remember what we said at the beginning of this article? Almost universally, federal employees say they wish they’d contributed sooner or more to their TSP. The first bill you pay each month should be to yourself – and with an automatic bi-weekly TSP deduction from your paycheck, you can lounge on the couch and smile at how well you’re saving without lifting a finger. Remember, time is your ally when it comes to saving. It doesn’t have to be a large amount; in fact, you can play around with different amounts that seem reasonable to you at the How Much Will My Savings Grow? calculator on the TSP site.
Here’s another reason to contribute to your TSP. There’s this benefit called “Agency Matching Contributions” which means your agency will match the regular employee contributions you make. Free money! How does that work you ask? Well, providing that you’re contributing to your TSP, your agency contributes too…up to a maximum, of course, but it’s at no cost to you. Matching contributions are not taken out of your pay and go into your traditional TSP balance.
FERS employees receive Agency Matching Contributions on the first 5% of pay you contribute to your TSP account – a dollar for dollar match up to the first 3% and 50 cents on the dollar for the next two percent. Thought of another way, for every $5.00 that you contribute, your agency contributes $4.00 in matching contributions. And don’t forget about the Automatic 1% Contribution, that’s a total of 5% that your agency is contributing to your TSP.
The point is if you don’t contribute to your TSP, you’re missing out on free money toward your retirement, AKA Agency Matching Contributions. In order to receive your full match, you must contribute at least 5% of your basic pay to your TSP account during the year.
If you’re still not convinced, let’s look at a few examples.
Let’s say your salary is $50,000 per year. Your Agency Automatic (1%) Contribution is $500. If you contribute 5% of your pay ($2500) into your traditional TSP account, your agency matches with 4% or $2,000. Altogether, that’s $5000 per year contributed to your future retirement! Is that affordable? Well, your $2500 contribution spread out over 26 pay periods is just slightly over $96 every two weeks, less than $7.00 per day.
Maybe you can’t afford to contribute the $2500 in the example above. Okay, let’s say you contribute 3%, or $1500, to your traditional TSP account. That equals $57.70 per pay period assuming 26 pay periods, or only about $4.00 per day! And don’t forget about the 3% Agency Matching Contribution that will also be contributed.
As soon as it’s financially possible, you should contribute at least 5% to your TSP so that you receive the full Agency Matching Contribution of 5 percent. Otherwise, you’re leaving money “on the table” that could be yours.
Civil Service Retirement System (CSRS) employees are eligible to participate in the TSP generally if you were hired on or after January 1, 1984, and you did not convert to FERS. To have your agency establish your TSP account you must make a contribution election using your agency’s automated system, such as Employee Express. If your agency doesn’t use an electronic system, you can complete form TSP-1.
Although CSRS employees do not receive Agency Matching Contributions to their TSP accounts, you can still take advantage of the TSP to provide a supplemental source of retirement income in addition to your CSRS retirement benefit. And you’re always fully vested because the funds in your TSP are strictly your contributions (no agency contributions). Plus, your traditional balance contributions and earnings are tax-deferred, i.e. you don’t pay tax until you withdraw the funds.
As we mentioned in our Retirement Readiness article, it’s important to create a retirement vision so you have at least a rough idea of what kind of lifestyle you’re aiming for and what that means financially. Interestingly, it’s particularly important for higher paid employees to save enough through their TSP because Social Security replaces less income of higher paid workers than it does for lower paid workers. And don’t think that because retirement is a long way off you don’t need to save now…WRONG! Slow and steady wins the race when it comes to savings versus the panicked realization that you need to catch up. Every bit helps and time is your biggest ally when it comes to the growth of your TSP.
There’s a Ballpark Estimate at the TSP website that can help you see how much you should save for retirement. What the heck? Give it a try How Much Should I Save?
Seriously think about saving more in your TSP – a pay raise or promotion is a good time to increase your contributions. Check out the TSP FAQs if you want more information.
See how your TSP performed for the past year, view 4th quarter performance, and verify your beneficiary information in your annual statement which is available the first week of February.
Check your quarterly TSP Participant Statements to view transactions for the previous three months.
Publish Date: September 21, 2020 © Tangerine, Inc. All rights reserved. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular individual or circumstance. This article is not intended to be a client-specific analysis or recommendation. Do not use this article as the sole basis for any financial decisions. Consider all relevant information. Information should not be considered as tax or legal advice. You should consult with your tax advisor and/or attorney regarding your individual circumstances.