Thrift Savings Plans are 401k-like retirement savings accounts available to federal civilian employees and members of the armed forces. As of 2010, federal employees were able to contribute up to $16,500 annually ($22,000 if they are age 50 or above) to their Thrift Savings Plan.
Among the benefits of the program are the following:
1. Employer contributions
In addition to their own contributions, some federal employees also receive employer contributions into their Thrift Savings Plan.
Members of the armed forces are eligible for employer contributions if they serve for six years of active duty in a specialty designated as eligible by the Secretary of their service branch. Civilian employees are eligible if they are Federal Employee Retirement System employees.
Eligible employees receive two forms of employer contributions. One is an automatic 1% of their compensation, which is vested (as are the earnings from a Thrift Savings Plan) after two years for some employees and three years for some. The second is a matching contribution of $1 for $1 for the first 3% of compensation the employee contributes to his or her Thrift Savings Plan, and 50 cents per $1 for the next 2% of compensation the employee contributes. This is vested immediately.
2. Tax advantages
Contributions to a Thrift Savings Plan are pretax, thereby lowering one’s taxable income for that year. Earnings from a Thrift Savings Plan are also not immediately taxed.
Contributions and earnings are only taxed upon withdrawal.
3. Flexibility of investment
Participating employees have considerable control over how their Thrift Savings Plan funds are invested. They can divide them up as they choose amongst several available funds, as well as then transfer back and forth later to alter the allocation.
There are ten available funds that a Thrift Savings Plan may invest in, managed by the Federal Retirement Thrift Investment Board. Two are fixed-income funds, three are stock funds, and five are life-cycle funds that mix stocks and bonds.
Since some of the funds invest in instruments such as stocks that can go down, it is possible to lose money in a Thrift Savings Plan, so participants are urged to do their research and choose carefully how to allocate their funds. But overall, Thrift Savings Plans are a valuable opportunity to save for retirement that most federal employees would do well to participate in. All the more so if they are among the federal employees eligible for employer contributions to their Thrift Savings Plan.
Paul Bright, “How Does a Federal Thrift Savings Plan Work?” eHow.
Steve Lane, “Thrift Savings Plan Helps Federal Workers Retire.” Investopedia.
“IRS Announces Pension Plan Limitations for 2010.” IRS.gov.
“Thrift Savings Plan.” TSP.gov.