What is a TSP?

Good question, I’m glad you asked!  One of the biggest reasons people pursue careers with the federal government is the decent benefits package, and so naturally I plan to explore these areas in some detail during future posts.  The TSP, short for Thrift Savings Plan, is one of the biggest benefits that new federal employees can take advantage of.

The TSP is the government’s version of a 401k plan, which in the finance industry is also called a defined-contribution retirement plan.  To break this plan down to its most basic level, the TSP allows you to direct a percentage of your pay into a retirement account, which is then invested in the stock market over the course of your career.  When you’re ready to retire, you’ll be allowed to draw from your investments in order to supplement your government pension.

These days the government is automatically enrolling new hires in the TSP plan at 3%, so one of the first things you should consider doing is increasing that amount to a higher level.  By law, you can save up to 25% of your pay with a ceiling of around $25,000, but this number changes from year to year.  People over 50 have the option to make catch-up contributions in order to grow their retirement savings, and all participants can direct their savings in mutual funds of their choosing, or “lifecycle” funds which automatically direct investment choices based on a projected retirement date.

Another benefit you need to be aware of is that the government will match your contributions up to 3%, and an individual agency might also kick in another percentage point or two.  That means that you should at least be participating at the minimum level in order to get your hands on some of that free money!  If you enroll in the TSP early, you’ll hardly notice any money missing from your paycheck, and your savings plan will become automatic.

It’s also important to know that your TSP contributions are considered pre-tax, which means that they’re deducted from the total amount of your payroll before any tax withholdings are calculated.  For younger folks especially, this makes the TSP one of the best ways to quickly grow a retirement nest egg, while at the same time reducing overall tax liability.  Over time, the interest on these tax-deferred contributions will compound, resulting in increasing savings.

This post is by no means everything you need to know about the TSP, but I really wanted to raise awareness of an important benefit to federal employment.  Be sure to check out the official TSP website for more information, including the latest figures on contribution limits, and important notes on taxes.  Also, if you’re looking for a beginner-level reference on how 401k-type savings plans work, be sure to check out David Bach’s book, The Automatic Millionaire.

Remember, federal employment benefits aren’t a free handout;  they’re something you earn.  Be sure to take full advantage of them!