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What is a Thrift Savings Plan?

Money Manager | Saturday, May 15th, 2010

What is a Thrift Savings Plan (TSP)?

A thrift savings plan, commonly referred to as a “TSP,” is a retirement plan that was created as a result of the Federal Employees Retirement System Act of 1986. This plan was designed to provide for the retirement needs of those who worked for the federal civil service. The thrift savings plan was designed to provide these federal employees with the same kind of retirement savings plan that private sector employees have as a result of a 401(k) plan. Contributing to the thrift savings plan is accomplished in a similar fashion as with other retirement planning accounts, with a set amount being automatically deducted from the employee’s paycheck while they are employed. There are a variety of funds within the thrift savings plan that a person can choose from when planning their retirement investments.

What are some of the benefits provided by a Thrift Savings Plan?

The financial advantages provided by a thrift savings plan are similar to those provided to private sector employees through a 401(k) plan. Pre-tax funds are used to make deposits to the plan, which can save a lot of money over the course of the plan. Because a person’s income and tax bracket are generally higher during the time they are employed, it can be quite beneficial to have taxes deferred on a savings plan until the point of retirement. Using pre-tax dollars also insures that more money will be available to be contributed to the plan, which will help a person’s savings grow faster. Just as is the case with a 401(k) plan, there are often matching contributions made by the agency that the person works for, in addition to the opportunity for the employee to make catch-up contributions. If a person has a pre-existing 401(k) plan or personal IRA, they will be able to move these funds into a thrift savings plan at the point when they become an employee of the federal civil service.

How does one become eligible for participation in the thrift savings plan?

To participate in a thrift savings plan, one must be a federal civilian employee or a member of the uniformed services. There are special requirements for those in the uniformed services if they wish to receive matching contributions. If a person agrees to serve for at least six years in active duty, and meets the other requirements in regards to type of service, then matching contributions will be made during that six year period, up to a certain amount. For civilian federal employees, agency or employer contributions will be made for those who are considered to be Federal Employee Retirement System employees. The amount of these contributions will be based on the amount the employee is contributing to the plan. Employees who are part of the Civil Service Retirement System can also contribute to the thrift savings plan, but they will not be able to receive matching employer contributions.

What are some of the other details concerning the thrift savings plan?

Just as is the case with other retirement plans such as a 401(k), there are some restrictions involved. There are limits on what the employee or employer can contribute each year. There are also vesting requirements in terms of years of service to be eligible to keep the employer contributions for some federal employees. It is possible to roll over other retirement plans into the thrift savings plan upon employment by the federal government. One can also choose from a variety of investment options using the funds in the savings plan.

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