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What is a Thrift Savings Plan?

What is a Thrift Savings Plan?

The Thrift Savings Plan (TSP), a brainchild of the Federal Employees' Retirement Security Act of 1986, is a unique retirement plan specifically tailored for federal employees and members of the uniformed services. This defined contribution plan is analogous to a 401(k) plan commonly offered in the private sector. Just like a 401(k), contributions made to a TSP are pre-tax, which can result in significant tax savings for the contributor.

In a TSP, federal employees have the opportunity to contribute up to $22,500 as of 2023. Those who are 50 years or older can make additional contributions, known as catch-up contributions, of up to $7,500. These contributions are referred to as "employee deferrals" or "employee contributions," and they grow within the account on a tax-deferred basis. Importantly, some federal employees may also be eligible for matching contributions from their employers, enhancing the potential growth of their retirement savings.

Investment Options in TSP

TSP participants have a variety of investment choices. They can opt to invest in one of the five core funds or a target-date fund, which represents a diversified mix of the five core funds. The investment risk is borne by the employee, making early and strategic investment crucial.

The Tax Implication of TSP: Traditional vs Roth

Much like Individual Retirement Accounts (IRAs), TSPs come in two flavors: traditional and Roth. In a traditional TSP, contributions are made with pre-tax dollars and are taxed upon withdrawal. In contrast, Roth TSPs are funded with after-tax dollars, which means that the earnings can be withdrawn tax-free during retirement. The Roth TSP option, introduced in 2012, provides an avenue for those who anticipate higher tax rates in retirement.

Withdrawals and Penalties

Similar to other tax-advantaged retirement plans, TSPs require that funds remain in the account until the account holder is at least 59 ½ years old or has separated from service after age 55. Otherwise, a 10% early withdrawal penalty may apply. At retirement, TSP participants can choose between regularly scheduled withdrawals, a lifetime annuity, or a lump-sum distribution. The latter can be rolled into an IRA for more flexible withdrawal options.

As with any retirement plan, the key to maximizing the benefits of a TSP is to start contributing early. By harnessing the power of compound interest, federal employees can significantly increase their retirement savings. Whether choosing a traditional or Roth TSP, considering employer matching, and deciding on the right investment options, the TSP offers a flexible and robust path to retirement for federal employees and uniformed service members.


A Thrift Savings Plan (TSP) is a 401(k)-style plan for Federal employees. A Thrift Savings Plan functions the same way a 401(k) does – you can elect to contribute a portion of your salary, known as an employee deferral or employee contribution, and the money will be allowed to grow in the account tax-deferred.

The TSP is only available to Federal Employees and United States military personnel. There is a flat contribution of 1% from the employer, and, depending on the type of Federal job, employees may be eligible for a matching contribution from the employer.

The TSP has offered a Roth option since 2012, allowing after-tax contributions that function just like those in a Roth 401(k). The Roth account will be kept separate from the before-tax contributions and employer contributions, so that the Roth side can be taken out tax-free in retirement but the before-tax side will be taxed as income upon withdrawal.

The traditional way to invest in a 401(k) style retirement plan is with before-tax contributions that allow the participant to lower their current-year taxable income, and then withdrawals are taxed in retirement. The employee bears the investment risk in his or her individual account, and has about 6 choices in a TSP, all of which are very low-cost in terms of fees, relative to the industry average.

Growth is tax-deferred, but in exchange for this privilege the IRS asks that funds remain in the account (or another tax-deferred account) until the participant is 59 ½ years old, or has separated from service after age 55, lest a 10% early withdrawal penalty is assessed.

Withdrawals from the TSP in retirement can be in the form of regularly scheduled withdrawals, a lifetime annuity, or a lump-sum distribution, the latter of which can be rolled into an IRA to allow for more non-recurring withdrawals. All of the funds are subject to Required Minimum Distributions (RMDs) after the participant has reached 70 ½ years old.

How Does a 401(k) Compare With Other Retirement Plans?
Where do I Get Started in Saving for Retirement?
What role does inflation play in my retirement planning?

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