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The Best Ways to Take Advantage of Government TSP Matching

Retirement

January 30, 2023

Everything You Need to Know About the Federal Government’s Thrift Savings Plan

So, you’re considering a job for the federal government. Or maybe you already have one. You’ve heard great things about the benefits. But you wonder, how good is the federal government TSP matching? Is the Thrift Savings Plan (TSP) as great as some suggest?

Here’s a reality: federal government jobs often don’t pay as well as private sector jobs. According to the Bureau of Labor Statistics, federal workers made 22.47% less on average than private sector workers in similar jobs in 2021. Yet, the federal government may make up part of the shortcoming with better benefits.

What is the Federal Government Thrift Savings Plan (TSP)?

One such benefit is the Thrift Savings Plan (TSP). The federal government offer the TSP to all employees and uniformed service members. In many cases, government TSP matching is superior to many private-sector 401(k) plans. The investment fees are often lower than many 401(k) plans, too. And listen to this: the federal government automatically credits 1% of your salary into your TSP. Even if you don’t contribute any money yourself!

This credit might not seem like a lot in the short term. Over time, though, it can balloon. Especially if you start working for the federal government early in your career. You may feel tempted at times to leave the public sector for a better salary. You might want to consider, though, what you stand to lose for later in your life. Because the TSP can set you up nicely for the retirement you have in mind. Sound good to you? Let’s learn a little more.

Differences Between the Government TSP and the Private Sector 401(k)

The TSP functions much like a traditional 401(k) program. Yet, the TSP includes some marked differences from those that private employers offer offered by private employers:

1. If you began or rejoined federal service as of October 2020, 5% of your annual salary is automatically deducted and invested in the TSP. That is, unless you decide to opt out, increase your contribution, or reach your IRS limit. This differs from private-sector retirement programs, which generally do not automate retirement savings.

2. The federal government automatically contributes 1% of an employee’s annual salary to the TSP. This is known as Agency / Service Automatic (1%) Contributions.

3. Government TSP matching can be as much as 5% of your annual salary. Private sector employers, meanwhile, generally match up to 3% of your salary.

4. TSP investment fees are lower, averaging around 0.05%. In the private sector, those investment fees may be as high as 2.5% to 5%. And fee-only financial advisors love minimizing your investment fees!`

5. With a TSP, you can only receive disbursements monthly, quarterly or annually once you reach retirement age. If you request it, TSP will also average out your payments based on your life expectancy. With a traditional 401 (k), you can deduct money as needed as long as you over the age of 59 ½, which is the legal retirement age.

6. Likes most retirement programs, you can begin to withdraw from your TSP at 59 ½ without paying penalties. However, if you retire age 55, TSP will waive the 10% early withdrawal penalty. If you qualify under Federal Employees Retirement System (FERS) special provisions, this age drops to 50.

Similarities Between the Government TSP and the Private Sector 401(k)

1. The annual contribution limit for both types of retirement accounts as set by the IRS is $22,500 for 2023 (up from $20,500 in 2022).

2. Employees aged 50 and over can make annual catch-up contributions of $7,500 in 2023 (up from $6,500 in 2022) to both types of accounts.

3. Payments from the balance of both types of accounts are taxable income. Keep in mind that this income is subject to federal, state, and local taxes.

The Roth TSP Option

Just as civilians can contribute up to $6,000 a year ($7,000 if you’re over the age of 50) to a Roth IRA, so can federal employees contribute the same amount to a Roth TSP.

The Roth TSP functions much in the same way as a Roth IRA. Federal government employees contribute income that has already been taxed into the account. When they withdraw the money during retirement, both the income and the qualified earnings in the account are not subject to federal taxes. This makes for a pretty sweet chunk of change, especially if you’ve diligently contributed over the years.

If you’d like, you can choose to split your contributions between the TSP and the Roth TSP. Keep in mind, however, that any government matching contributions must be placed in the traditional TSP. Which means that your money will grow faster in a traditional TSP.

As an example, you have the option to earn the maximum government match in your traditional TSP, and then direct any additional contributions to your Roth TSP account.

During retirement, that non-taxed income from a Roth TSP can make a big difference, especially if you want to travel a lot – whether that travel is on a cruise to Alaska, or to visit your grandkids, or both.

Who Qualifies for the Federal Government TSP?

Most federal employees are eligible to participate in the TSP, including government TSP matching, if they are actively employed as a civilian employee or member of the uniformed services.

There is some nuance to the system. On January 1, 1987, the Federal Employees Retirement System (FERS) was put into place, which was designed to conform federal retirement plans in line with those in the private sector. FERS provides what was formerly known as a pension to federal employees. It is composed of a benefits plan, Social Security payments and disbursements from the TSP.

All FERS employees are automatically enrolled in the TSP, which means that most hires in the federal government after 1985 are eligible to participate in the program. In addition, Civil Service Retirement System employees (CSRS), who were generally hired before 1984, also qualify. So do active duty or Ready Reserve members of the uniformed services. In total, 6.2 million Americans hold TSP accounts.

So, who doesn’t qualify for the TSP? Some independent contractors working for the federal government, for example. And, of course, people who don’t currently work for the federal government. If you think that you may qualify, but are not sure, ask your supervisor.

What Can I Invest In Within the Federal Government TSP?

So you’ve contributed to your TSP account. And you’ve taken advantage of government TSP matching. What are your options for investing your money?

One nice thing about the TSP is its simplicity. You only have six fund options, along with a mutual fund option (which the government added in 2022). The average private-sector 401(k) generally has between 8 and 12 options, and sometimes many more.

The six individual TSP investment options include:

G Fund (Government Securities Investment)
F Fund (Fixed-Income Index Investment)
C Fund (Common-Stock Index Investment)
S Fund (Small-Capitalization Stock Index Investment)
I Fund (International Stock Index Investment)
L Fund (Lifecycle Funds)

Each fund focuses on a specific type of investment:

The G Fund generates returns above those of short-term U.S. Treasury securities.
The C Fund matches the performance of the Standard and Poor’s 500 (S&P 500) Index.
The I Fund matches the performance of the MSCI EAFE (Europe, Australasia, Far East) Index.
The S Fund matches the performance of the Dow Jones U.S. Completion Total Stock Market Index.
The F Fund matches the performance of the Bloomberg U.S. Aggregate Bond Index.

The L (Lifecycle) fund invests in a mixture of the five funds listed above. Functioning much like a target date fund, the investments are adjusted every quarter to shift from higher risk and reward to lower risk and reward as you get closer to retirement age. This is a great option if you don’t know much about investment and want your retirement account to do the work for you, not the other way around.

Approach The TSP Mutual Fund Option With Caution

If you want more investment flexibility, you can also choose to invest a portion of your TSP funds into a mutual fund window. A mutual fund window pools money from investors into securities such as stocks, bonds and short-term debt. Mutual funds are companies, and investors buy shares in them just like people buy stock in other companies that produce goods or provide services. Your returns are your share of the income the mutual fund generates.

As a note of caution if you’re considering this option, the fees for investing in the mutual fund pool through the TSP are in addition to the fees you already pay. You also must have at least $40,000 in your TSP account and make an initial transfer of $10,000. At no time are you allowed to invest more than 25% of your TSP balance in a mutual fund window.

If you’re interested in learning more, the TSP has a great tool that allows you to compare up to three of its fund options at a time.

What Happens to Your TSP Account if You Leave Federal Service?

Once you leave federal service – for example, you retire from the military or chose a job in the private sector – you can no longer make employee contributions to your TSP account.

However, as long as your account balance is more than $200, your account can stay active. You can still change your investment mix, transfer eligible money into your account and accrue earnings. You can rely on the safety of a federal government run program – or bemoan that the investment strategies are not robust enough.

Another option is to move your account balance to a traditional IRA, or to the 401(k) offered by your new employer. If you are not yet retirement age, and you’re still contributing to your retirement accounts, your total balance will be larger. A larger balance will accrue more interest over time if you keep all of your investments in one place. However, be cognizant of the fact that you will likely pay higher investment fees for accounts not associated with the federal government.

Finally, if you ever return to government service, you can easily re-enroll in the TSP, and roll over money from other retirement accounts.

Is the TSP a Good Option for Saving for Retirement?

The short answer is: yes, it’s a pretty strong option compared to many workplace retirement plans. If you are currently a federal employee who has access to the TSP, you likely can consider it one of your best options for saving for retirement.

Not only can federal government TSP matching be up to 5% of your salary, but you’ll also pay much lower-than-average investment fees on the account. Pooled between the federal government, and managed by the Federal Retirement Thrift Investment Board, the investments in the funds are robust and refreshingly straightforward.

A final thing to consider is that you can take out loans from your TSP at low interest rates. (Currently, the interest rate on a TSP loan is 3.875%). Some people use these loans to make down payments on houses or to start businesses. Although you repay the loan with interest back into your account, the interest rate never changes over the life of the loan. And if you’re a federal employee, the payments can be deducted directly from your paycheck. The minimum loan is $1,000, and the highest amount you can deduct is $50,000.

Where Can I Find the Federal TSP Login Website?

You can access the federal TSP login page using this link: https://www.tsp.gov/login.

If you have questions about the retirement account’s benefits (including the strong government TSP matching program), contact your human resources manager. You also can download the TSP mobile app. The app has a virtual assistant, called Ava, that offers help with your TSP account around the clock.

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