A Thrift Savings Plan is a retirement savings plan for federal employees that is comparable to a 401k. Federal civilian employees and members of the armed forces are all eligible to participate in Thrift Savings Plans. Some also are eligible to receive employer matching contributions.
Specifically, for civilian employees, only Federal Employee Retirement System (FERS) employees are eligible for matching contributions. These employees receive an automatic 1% of their compensation contributed to their Thrift Savings Plan. In addition, for everything they choose to contribute to their Thrift Savings Plan, the first 3% is matched dollar for dollar, and the next 2% is matched at fifty cents per dollar.
That is, if they designate 1% of their compensation for their Thrift Savings Plan, the employer contribution would be the same 1%. For a 2% contribution, the matching contribution would be 2%. For 3% it would be 3%. For 4% it would be 3.5%. For 5% it would be 4%.
Don’t forget there’s also the automatic 1% employer contribution on top of this. So really if an eligible employee put 5% or more of his compensation into his Thrift Savings Plan, there would be an employer matching contribution of 5%.
Members of the armed forces are eligible for matching contributions for six years of active duty service in any specialty so designated as eligible by the Secretary of their service branch.
All of the employee’s contributions and the employer matching contributions to a Thrift Savings Plan are vested immediately. The 1% non-matching employer contributions, and the Thrift Savings Plan’s earning become vested after three years for most employees and after two years for some in certain positions.
There is an annual cap on contributions to a Thrift Savings Plan. For 2010, the cap is $16,500 for employees up to age 49, and $22,000 for employees age 50 and over. An employee may also transfer funds from any rollover eligible retirement plan into his or her Thrift Savings Plan.
Those who participate in a Thrift Savings Plan benefit from tax deferral. Contributions to a Thrift Savings Plan are made pretax, thereby lowering one’s taxable income for that year. Neither the money contributed nor any earnings made from this money are taxed until funds are withdrawn.
At this time, there are ten 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. The employee has the flexibility to divide his Thrift Savings Plan up among two or more funds if he or she chooses, plus transfers are allowed to change the allocation at any time.
Note that when you invest in things like stocks that can go down as well as up, there is a certain amount of risk involved. So employees are urged to educate themselves on the fund choices and allocate their money carefully according to their goals and degree of risk-aversion.
Overall, Thrift Savings Plans represent a valuable opportunity for federal employees to save for their retirement. Not only are they putting some of their own money aside for the future, but they may be receiving additional employer contributions also, and they are gaining significant tax advantages.
Sources:
Paul Bright, “How Does a Federal Thrift Savings Plan Work?” eHow
“IRS Announces Pension Plan Limitations for 2010” IRS.gov
“Thrift Savings Plan” TSP.gov
Steve Lane “Thrift Savings Plan Helps Federal Workers Retire” Investopia
