We all know the importance of saving for retirement. But for federal employees, it’s not as simple as sticking a percentage of each paycheck into your 401(k)… or is it? If you’re a member of the uniformed services or a federal employee covered by the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS), you’re eligible for the Thrift Savings Plan, or TSP. (Sorry to add to the alphabet soup — the government loves its acronyms!)
But what exactly is the thrift savings plan, and how is it most effectively utilized? Glad you asked! Read on to learn everything you need to know about this surprisingly simple retirement plan.
What is the Thrift Savings Plan (TSP)?
The TSP operates in a remarkably similar fashion to the 401(k) plans your private sector friends have. A segment of your pay will be automatically deferred into an investment account, and you may be eligible for a matching contribution made by your employer. (That is, for every dollar you funnel off to your TSP, your employer might add a dollar of their own, up to a certain pre-arranged percentage of your total salary.)
Like other retirement plans, you can choose between two taxation schemes. You can make pre-tax elective deferrals, in which you won’t pay taxes until you withdraw the money at retirement, or post-tax Roth contributions, which won’t get you a tax break today but will mean tax-free income later on down the line.
Investing the funds in your TSP is simple: the plan offers a simple, if limited, menu of options, including professionally designed lifecycle funds. What’s more, the plan is managed at rock-bottom administrative and investment fees, making it a cost-effective way to plan for your future.
And since deferrals come directly out of your paycheck on a regular basis, you don’t have to worry about making manual contributions — which is a good thing, since consistently funding your account is a key component to making the most of compound interest.
What To Do With Your TSP at Retirement
After a long career both challenging and fulfilling, you definitely want to be able to access your hard-won wealth with as little red tape as possible. Historically, flexibility and ease of use haven’t been TSP strong points… but fortunately, all of that’s due to change this September.
The old rules were pretty confining, forcing you to make a full withdrawal election either the year you separate from service or six months after your 70th birthday. You’d receive monthly payments whose amounts could only be changed once per year — and you’d have to submit paper forms by mail or fax to make those changes.
But the times, they are a-changin’, and even the government catches up eventually! Starting on September 15, 2019, TSP participants will be able to customize installment payments and change payment frequency any time they want, all through the convenient, secure online tools at tsp.gov.
Since these accounts do have such low expense ratios, it may make sense to leave your TSP funds where they are and withdraw as necessary, especially given these new, flexible guidelines.
Then again, you could also consider rolling your TSP over into an IRA, which also carries a wide array of withdrawal schedules and strategies and offers a much wider universe of investment options.
Like most any retirement plan, your TSP is subject to required minimum distributions, or RMDs, once you hit age 70.5. If you don’t take out enough in elective withdrawals throughout the year, payments in the right amount will be automatically generated and sent to you.
Remember to Keep Things Personal
No matter who you work for or what your long-term financial goals are, it’s important to remember that your personal retirement needs are just that: PERSONAL. At McClain Lovejoy, we’re dedicated to making sure you enjoy the hard-won fruits of your life of labor, and we know how to create customized retirement strategies that keep as much of your money as possible in your pocket.
Ready for an in-depth look at your own finances, including the Thrift Savings Plan? Reach out today to set up a follow-up appointment or free first-time consultation. After all, you’ve already done the hard work — that’s what your career is for. Retirement should be easy!