What Is a Thrift Savings Plan?

Thrift Savings Plans Explained

A soldier and her family look over her TSP plan.
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A Thrift Savings Plan (TSP) is a type of retirement savings plan that the government offers to federal employees. In terms of contributions and tax treatment, a TSP shares similarities with traditional 401(k) plans offered to employees in the private sector. 

Having access to a TSP at work can help you save for retirement on a tax-deferred basis. If you're a federal employee or are considering a career in government, here's more on how these retirement savings plans work.

Definition of a Thrift Savings Plan

A TSP is a tax-deferred retirement savings plan available to federal employees that is similar to 401(k) plans many employers offer.

Federal employees who participate in a TSP can save part of their income for retirement. Like a 401(k), your employer takes out a tax-advantaged percentage of your choosing from your paycheck and may match your contribution.

If you're covered by the Federal Employees Retirement System (FERS), you can save in a TSP while also taking advantage of a FERS retirement annuity and Social Security benefits. If you're covered by the Civil Service Retirement System (CSRS) or are a member of the military, the TSP is a supplement to a CSRS annuity or military retired pay.

If you're not sure whether you're covered by FERS or CSRS and how that affects your retirement savings options, check with your personnel or benefits office.

How Does a Thrift Savings Plan Work? 

The TSP is designed solely for federal employees who want to save money for retirement. The purpose of these plans is to provide retirement income, in addition to any annuity benefits you may receive through the FERS system or CSRS. 

When you become a federal employee, you can begin making contributions to a TSP right away; there's no waiting period. There is, however, a waiting period to receive the 1% automatic matching contribution to the plan. Once this waiting period ends, you can begin receiving the automatic 1% match even if you're not deferring anything from your paychecks into the plan.

Matching contributions are only available to federal employees covered by FERS; no match is offered to CSRS employees.

If you do make contributions as a FERS employee, the first 3% of pay you contribute is matched dollar-for-dollar. The next 2% is matched at 50 cents on the dollar.

You can choose between a traditional or Roth TSP designation. A traditional TSP is taxed like a traditional individual retirement account (IRA). You make contributions using pre-tax dollars, meaning you'll pay taxes when you withdraw the money.

With a Roth TSP, you make contributions on an after-tax basis, so you pay taxes upfront instead of when you withdraw the money. You have the option to make both traditional and Roth contributions, too, up to the annual contribution limits.

If you're not sure whether to choose a traditional or Roth TSP, you can use the federal contribution comparison calculator to help you decide.

How Much Can I Contribute to a Thrift Savings Plan?

For 2021, you can contribute up to $19,500 in elective deferrals to a TSP. There's also a catch-up limit of $6,500 for federal employees aged 50 or older. The total amount that you're allowed to contribute between elective deferrals, catch-up contributions, and matching contributions is $58,000.

If, for any reason, you end up making excess deferrals to your TSP beyond what's allowed by the IRS, you can request a refund of those contributions. You'll need to use Form TSP-44 to request a refund of excess deferrals. The TSP’s administration must receive your request by March 15 of the year after you made the excess contributions.

Do Thrift Saving Plans Have Any Penalties?

The TSP follows similar tax rules as traditional or Roth IRAs. That means you might have to pay a 10% early withdrawal penalty for taking money from the plan before age 59 ½. You may also be responsible for paying tax on earnings withdrawals.

That being said, you can take in-service withdrawals from your TSP. There are two types of early withdrawals allowed: financial hardship withdrawals and age-based in-service withdrawals.

Financial Hardship Withdrawals

You're allowed to take money out of your TSP if you have a genuine financial need, but you need to be eligible for at least one of the following criteria:

  • Recurring negative monthly cash flow
  • Unpaid medical expenses and personal casualty losses that aren't covered by insurance
  • Unpaid legal expenses stemming from a separation or divorce

Next, you have to follow these rules:

  • You have to withdraw $1,000 or more.
  • You may only withdraw your own contributions and any earnings from those contributions.

If you have a civilian TSP account and a uniformed services account, you can only make a financial hardship withdrawal from the account that's associated with your current employment.

You're required to certify under penalty of perjury that you have a genuine financial hardship when taking a hardship withdrawal.

Age-Based In-Service Withdrawals

Age-based in-service withdrawals are allowed if you're 59 ½ or older but still working as a federal employee. 

Just like hardship withdrawals, there are rules you need to follow:

  • You can only withdraw funds in which you are vested based on your years of service.
  • The amount of your age-based withdrawal must be at least $1,000 or your entire vested account balance.
  • You can only take up to four age-based withdrawals per calendar year.

If you have one civilian TSP account and one uniformed services TSP, you have to withdraw from your uniformed services account.

You have to pay a 20% federal income tax on the taxable portion of an age-based withdrawal. The only exception is if you're rolling the money over to an IRA or another eligible employer retirement plan.

Types of TSP Investments

Just like with a 401(k), the money you save in a TSP can be invested. Federal employees can choose to invest their money in a variety of lifecycle funds and individual funds. 

Lifecycle funds are similar to target-date funds in that the asset allocation changes automatically over time, based on your target retirement age. You can choose from 10 lifecycle funds, including an income fund and funds that have target retirement dates ranging from 2025 to 2065. 

You have five options for individual funds, too, each with a different investment focus. Here's how those funds compare at a glance:

  • G Fund: Invests in government securities that are specially issued to the TSP
  • F Fund: Includes corporate, government, and asset-backed bonds
  • C Fund: Includes mid- and large-cap stocks
  • S Fund: Includes a mix of mid- and small-cap stocks
  • I Fund: Invests in more than 20 international stocks from developed countries

You can pick which funds you'd like to invest in based on your risk tolerance and your time horizon for investing. With any fund you choose, consider its performance, asset allocation, and the expense ratio you'll pay to own it.

Alternatives to a Thrift Savings Plan

You're not required to save money in the TSP. It's designed to supplement any retirement benefits you may already be receiving through FERS or CSRS. But if you're a FERS employee, you can benefit from matching contributions. 

If you're looking for other places to save for retirement, you may consider an IRA. With this option, you're subject to annual contribution limits and IRS tax rules for withdrawals, but you could use the IRA to enhance your retirement savings plan.

Participating in a TSP doesn't bar you from saving in a traditional or Roth IRA.

You may also consider an annuity as part of your retirement strategy. Annuities can provide guaranteed income in retirement for both you and your spouse. If you're already receiving a FERS or CSRS annuity, purchasing an additional annuity can create a separate stream of retirement income.

Key Takeaways

  • A TSP is a tax-advantaged retirement savings plan for federal employees.
  • The contribution limits for a TSP are similar to 401(k) limits.
  • Taking money from your TSP early because of a financial hardship could result in a 10% early withdrawal penalty. 
  • TSPs offer up to 15 funds you can choose from to grow your retirement wealth.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.