Thrift Savings Plan (TSP) Definition, How It Works, Tax Rules

The federal government offers a different option to its employees to save for retirement than private companies. The Thrift Savings Plan (TSP) is very similar to popular plans found in the private sector, allowing for pre-tax contributions, employer matches, and long-term earning potential in a variety of funds. But it has some unique options that can make it an attractive benefit for signing on to a government job.

Here’s a closer look at how TSPs work and what you need to know before opting to participate in one.
What is a Thrift Savings Plan (TSP)

A TSP is a retirement savings program for most people who work part-time or full-time for the federal government at an eligible pay status. More specifically, TSPs are available to:

• Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS) employees
• Members of a uniformed service, either active duty or part of the Ready Reserve
• Civilians in some additional government service categories

• Like 401(k) and 403(b) plans offered to those who work in the private and nonprofit sectors, TSPs give you the ability to divert earnings into investments that can grow into a tax-deferred nest egg for retirement. Generally, eligible employees are automatically enrolled in a TSP with 5% of their salary allocated into an individual plan account. This is the minimum you’re required to contribute in order to receive a full match from your employer.

• “[Federal employees] are immediately vested into the TSP,” says Samuel Eberts, junior partner and financial advisor with Dugan Brown. “Even if they separate from service shortly after joining, they will be able to keep any contributions, most of the government match (if applicable) and any growth associated with the account. Additionally, military employees who are part of the blended retirement system (BRS) and FERS employees both receive matching contributions from the government.”

There are two types of TSPs that may be available to you: traditional TSPs and Roth TSPs.

• A traditional TSP uses pre-tax contributions from your salary and employer matching to fund the account. You don’t pay taxes on those investments and earnings until you begin to take distributions, usually after you reach retirement age.
• A Roth TSP contains post-tax contributions, which will not be taxable again when you withdraw that money. You may be able to participate in one or both types of TSPs. Follow link to read more.: https://bit.ly/3IOwsAj