Definition of the Thrift Savings Plan
The Thrift Savings Plan (TSP) is a type of retirement savings plan offered by the government for federal employees. The TSP is a retirement savings plan in which federal employees can participate by contributing a portion of their income for retirement. Like a 401(k), a specified percentage of your salary is deducted on a pre-tax basis, and you may also receive matching contributions.
How does the Thrift Savings Plan work?
The TSP is exclusively designed for federal employees who wish to save money for retirement. The purpose of these plans is to provide retirement income, in addition to any retirement benefits you may receive through the FERS or CSRS systems.
How much can I contribute to the Thrift Savings Plan?
As of 2021, you can contribute a maximum of $19,500 in voluntary contributions to the TSP (increased to $20,500 in 2022). There is also a catch-up contribution limit of $6,500 for federal employees aged 50 and over. The total amount you are allowed to contribute between elective contributions, catch-up contributions, and matching contributions is $58,000 ($61,000 in 2022).
Are there penalties for the Thrift Savings Plan?
The TSP follows tax rules similar to those related to traditional IRA or Roth accounts. This means you may have to pay a 10% early withdrawal penalty for taking money out of the plan before age 59 and a half. You may also be responsible for paying taxes on the withdrawal gains.
Types of TSP Investments
Like a 401(k), you can invest the money you save in the TSP. Federal employees can choose to invest their funds in a variety of mutual funds and individual funds. Asset allocation automatically changes over time in lifecycle funds, based on your target retirement age. You can choose from ten lifecycle funds, including income funds and funds with target retirement dates ranging from 2025 to 2065.
Alternatives to the Thrift Savings Plan
You are not required to save money in the TSP. It is designed to complement any retirement benefits you may already receive through FERS or CSRS. However, if you are a FERS employee, you can take advantage of the matching contributions. If you are looking for other places to save for retirement, you might consider an IRA. With this option, you are subject to the annual contribution limits and IRS withdrawal tax rules, but you can use an IRA to enhance your retirement savings plan.
Source: https://www.thebalancemoney.com/what-is-a-thrift-savings-plan-5187012
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