Federal workers and military personnel are offered a supplemental retirement savings plan to complement their pensions – the Thrift Savings Plan, or TSP. Just how well does it measure up to other forms of popular retirement accounts?
Picture a 401(k) or 403(b) with five fund choices. In a nutshell, that is what the TSP resembles. Does this sound limiting? Whether you perceive it to be or not, there is no denying that the funds offered by the TSP have performed well in recent history.
A traditional TSP is funded akin to a traditional 401(k) or 403(b). Pre-tax dollars are directed from your paycheck to fund the account, thereby reducing your taxable income. Put another way, you don’t pay tax on traditional TSP contributions or earnings until they are withdrawn. (Contributions to a traditional TSP made by uniformed service members are tax-exempt and those contributions may be withdrawn tax-free, although earnings off of them will still be subject to tax.)
Is a Roth TSP option available, allowing you to contribute after-tax dollars in exchange for potential tax-free withdrawals down the road? Yes. You can have a Roth TSP. No income limits preclude you from having one. In fact, you can make both Roth and traditional contributions to a TSP per your contribution election. You can’t convert a traditional TSP balance to a Roth TSP balance, however.
Assets within a TSP may be directed into one or more of five funds. BlackRock Institutional Trust Company, a division of investment giant BlackRock, manages four of them: the F, C, S and I funds. These are all index funds: one tracks large caps, one small caps, another international stocks, and a fourth the U.S. bond market. The fifth, the G fund, is managed by the Federal Retirement Thrift Investment Board (FRTIB), which oversees the TSP program. G fund assets are invested in a special-issue Treasury security; therefore, those assets are principal-protected.
The funds have performed pretty well of late. As a 2013 Wall Street Journal column noted, the TSP bond fund under BlackRock’s supervision beat its mirror – the Barclays U.S. Aggregate Bond index – every year from 2007-12. From 2003-12, it averaged a return of 3.61% a year. The large-cap fund, which mimics the S&P 500, tied or beat the performance of that index in all six of those years as well. The other two funds beat their benchmarks in 2010, 2011 and 2012.
It is often stated that investors shouldn’t put up with annual account fees of more than 1%, and the FRTIB has taken that to heart. The typical stock fund charges an annual administrative fee of around half a percent; retirement savers using the TSP saw their funds charge just 0.029% yearly expenses in 2013.
Doesn’t an IRA give you many more investment choices? Undeniably. The handful of funds offered by the TSP pale in comparison to the variety of investments you can hold in an IRA. You can go Roth in the TSP, however, just as you can with an IRA.
How does the TSP compare to indexed universal life insurance? As TSP funds have beaten benchmarks in recent years, the TSP compares favorably to IUL policies (which are sometimes strongly marketed to service members). In the TSP, your money isn’t tied up in an insurance product. While the cash value of IUL policies may grow over time as a byproduct of the insurance company investing the pooled money of policyholders, their cash value may also decrease if the broad stock market declines. While offering some downside protection, IUL policies also commonly put a ceiling on annual growth of cash value. You will find no such ceiling on TSP index funds.
Are loans permitted? Yes, and the rules are similar to those for 401(k)s and 403(b)s. As long as you work for the federal government or are in the uniformed services, you can take a loan and pay it back with interest. (You must be in pay status.) General purpose loans have repayment terms of 1-5 years, residential loans (for home buying or home construction) repayment terms of 1-15 years.
Are there employer matches? Yes, in some instances. TSP participants who are also enrolled in the Federal Employees’ Retirement System (FERS) receive Agency Matching Contributions (AMCs) from whatever federal agency employs them. The first 3% of pay contributed to the TSP is matched dollar-for-dollar, the next 2% at 50¢ on the dollar. Matching contributions cease if regular employee contributions cease. Catch-up contributions are also allowed starting in the year a TSP participant turns 50.
If you would like to learn even more about the retirement saving potential of the TSP, talk to a financial or human resource professional today.
About the Retirement Financial Advisor
Robert Pagliarini, PhD, CFP®, EA is passionate about helping retirees build the retirement of their dreams. He has over 25 years of experience as a retirement financial advisor and holds a Ph.D. in retirement planning. In addition, he is a CFP® Ambassador, one of only 50 in the country, and a real fiduciary. His focus is on how to help make retirement portfolios last decades while providing a steady source of income. When he's not helping people plan their retirement, he can be found writing his forthcoming book, The Retirement Myth: Escape Average Retirement & Create a High Performance Retirement. If you would like a second opinion to see if your retirement financial plan will keep you comfortable and secure, contact Robert today.