The Thrift Savings Plan—the federal government's version of a 401(k) plan—has almost 5 million participants. Nearly 90% of civilians who are covered by the Federal Employees Retirement System (FERS) participate in the TSP. Federal government workers can contribute up to $18,000 to their plans in 2017 ($24,000 if they're 50 or older). Contributions to a traditional TSP are deducted from their paychecks before taxes and grow tax-deferred.
The TSP was designed to supplement a small government pension and Social Security. The government offers a calculator you can use to figure out how much to save, based on expected payments from your pension and Social Security, at www.tsp.gov/PlanningTools/Calculators.
Federal employees covered by FERS automatically receive a contribution of 1% of their pay, whether or not they contribute any of their own money. But if you stop there, you'll leave a lot of money on the table. The government matches contributions dollar for dollar on up to 3% of basic pay, and 50 cents on the dollar for the next 2%. You can continue to contribute up to the maximum, but the government matches only 5% of your pay.
The TSP offers the lowest investment fees you'll find anywhere: 0.029% a year. Its portfolio is made up of five index funds that invest in large companies, small companies, international firms, fixed-income investments and government securities. You can choose your own investment mix or invest in one of the lifecycle funds, which have diversified portfolios of index funds that gradually grow more conservative as you approach retirement.
As is the case with most large 401(k) plans, you can borrow half of your balance, up to $50,000. The TSP offers two types of loans: a general-purpose loan, which must be paid back in five years, and a residential loan, which must be used to buy or build a primary home and has a repayment plan of up to 15 years.
In 2012, the government added a Roth option to the TSP. As is the case with a Roth 401(k), contributions are after-tax but withdrawals are tax- and penalty-free as long as you've had the account for at least five years and are at least 59½ or older when you take the money out.
You can roll money from traditional IRAs and other employer-provided retirement plans into your plan, even after you've left your government job. Didi Dorsett of Alexandria, Va., who retired from the Navy in 2007, rolled her TSP into an IRA at the suggestion of a financial adviser and now regrets closing the account. Even leaving a small balance in the TSP would have given her the option of rolling other tax-deferred accounts into the plan, says Dorsett, who is training to become a certified financial planner (CFP). "The expense ratios are unbeatable, and they offer an incredibly sound selection of investments."
Members of the uniformed services don't currently receive a match, and their participation rate is much lower—about 45% as of August 2016. That's unfortunate, says Audry Batiste, who became a CFP after retiring from the Air Force. Batiste served for 20 years, which makes him eligible for a pension, but many members of the military don't stay in the service that long. Contributing to a TSP, he says, "is giving yourself some predictability and additional options" for retirement income. Batiste contributed to his TSP when he was in the service and still has money in the account. He opted against rolling it over to an IRA because he wanted to continue to take advantage of the plan's low fees.
The main downside to the TSP is that its withdrawal options are not as flexible as those for IRAs and many large 401(k) plans. Participants are allowed only one partial withdrawal, in which they can take out as much as they want. After that, the only option is a full withdrawal using one or a combination of the following: a lump sum for the entire amount, an annuity, or a series of monthly payments that will be paid until the account is depleted. If you opt for monthly payments, you can change the amount of the payments only once a year.
Lynn Alsup, 66, of Lee's Summit, Mo., uses the monthly payment option to supplement his other retirement income. Alsup, an electrical engineer, started contributing to the TSP as soon as he was hired by the federal government in 1992. Alsup says his regular contributions to the TSP, combined with savings from a former employer's 401(k) plan, allowed him to retire at age 57. Despite the withdrawal limitations, he says the TSP's expenses are so low "that it doesn't make any sense to do anything else with it." If you want more flexibility to take distributions after you retire, you'll probably need to roll at least some of your savings into an IRA. The agency's board has proposed more-liberal withdrawal rules, but any changes will require an act of Congress.
Thrift Savings Plan: More perks for the military
Members of the uniformed services who invest in the Thrift Savings Plan don't currently receive a match for contributions. But starting in 2018, new members of the military will receive the same match that civilian employees receive, says Kim Weaver, a spokesperson for the TSP. Existing members of the military with 12 years or less of service will have the option of receiving matching contributions in exchange for a reduction in their pension.
However, some servicemen and servicewomen get a deal not available to any other federal employee: Income earned when serving in a designated combat zone is excluded from federal tax. If they invest that money in the Roth TSP option, withdrawals won't be taxed, either—so they'll never pay taxes on contributions or earnings. "It's a great deal that a lot of deployed service members don't know about," says Russell Robertson, a retired Army colonel and certified financial planner in Springfield, Va.