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.
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