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Is Thrift Savings Plan different than 401K ?

Jul 14, 2014 by Lorena from Chula Vista, CA in  |  Flag
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Lorena,

The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees, including employees covered under the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS), and servicemembers. When you contribute to the TSP, you get the same types of savings and tax benefits as you would if you contributed to a 401(k) offered by a private-sector employer.

How much you accumulate for retirement in your TSP account depends on how much you contribute and how much you earn on your contributions over time. When you enroll, you can decide what percentage of pay you want to contribute each pay period, and your contributions are sent directly to the TSP. However, you can only contribute up to a certain limit each year. In 2014, this contribution limit is $17,500 ($23,000 if you're age 50 or older and eligible to make catch-up contributions). If you're automatically enrolled in the TSP and don't elect a different contribution amount, 3% of your basic pay will be deducted from your paycheck and deposited in your TSP account each pay period.

You can choose to make traditional contributions, Roth contributions, or both. Traditional contributions are pretax contributions; they're taken out of your paycheck before your income is taxed, which lowers your taxable income now. Your pretax contributions and any earnings on them accumulate in your account tax deferred, but will be taxable when you withdraw them (except for contributions made from tax-exempt pay earned while in a combat zone). Roth contributions are after-tax contributions; there's no current tax benefit because your contributions are made after your income is taxed. But because they've already been taxed once, your Roth contributions are always tax free when you withdraw them. Any earnings on your contributions will also be tax free when you withdraw them, assuming you meet certain requirements. You can decide how to allocate your contributions among the diverse investment options offered by the TSP, based on your investment goals and tolerance for risk.

Other TSP benefits depend on which retirement system covers you. For example, if you're covered by FERS, you will also receive Agency Automatic Contributions equal to 1% of your basic pay each pay period (you receive these whether or not you contribute to your TSP account). You may also be eligible to receive Agency Matching Contributions on the first 5% of the pay you contribute each pay period. The first 3% of what you contribute is matched dollar-for-dollar; the next 2% of what you contribute is matched at a rate of 50 cents on the dollar. However, if you're covered by the CSRS or are a servicemember, you're generally not eligible to receive Agency Automatic or Matching Contributions (servicemembers in critical specialties may receive matching contributions under certain circumstances). Agency contributions and any earnings on them accumulate in your account tax deferred, but will be taxable when you withdraw them.

These are just some of the basics. For more information about the TSP, visit the TSP website at www.tsp.gov.

Comment   |  Flag   |  Jul 15, 2014 from Milwaukee, WI

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If you are talking about the US Government Thrift Savings Plan (TSP) they are essentially the same.

Contributions are limited in both types of accounts to 17,500 per year with catch-up contributions of $5,500 for those age 50 and over.

You generally may not take distributions without penalties before age 59 1/2 (there are exceptions)

You must take distribution starting 1 Apr of the year after you turn 70 1/2 (unless still working and meeting other requirements). Unless you selected a Roth option, distributions from both accounts are taxed as ordinary income.

TSP offers a Roth option. An employer has the option to offer a Roth option in a 401(k) as well.

TSP is different in that it offers an investment option, the "G" Fund which is not available anywhere else in the world.

If you are in the military, you have options when you are deployed to a combat zone that are not available in a 401(k) plan.

Comment   |  Flag   |  Jul 15, 2014 from Alexandria, VA

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Herbert N Glass Level 18

Yes they are very different with respect to a participant's tax treatment on their own "Elective Deposit" usually made through payroll withholding.

For example, you are probably aware that a participant may elect to fund either type of plan through payroll deductions. However, if the participant is making a 401(k) plan deposit, the participant may elect to consider the deposit as either coming from before tax dollars (that is with dollars that have never been taxed) or the deposit may be made with after tax dollars (considered a "Roth" deposit). Once the deposits are made, they may be invested. If the invested deposits are made with before tax dollars (or non-taxed dollars) the invested money generally will not have to pay any taxes until some or all of the money is withdrawn. On the other hand, If the invested deposits are made with Roth dollars (after tax dollars) then when the invested money is withdrawn, there will be no tax on such money. The participant will therefore be able to use 100% of the money coming from a Roth account and generally never have to pay any taxes on the distributions received.

Now, what is a Thrift Plan. I like to call it an old fashion 401(k) plan. Why do I think of a Thrift Plan as such? Well, it is because like a Roth 401(k) Plan, the participant's contributions are made with after tax dollars, also, while the money is in the plan, it may be invested on a tax-free compounded basis. However, unlike a Roth 401(k) Plan, when the invested money is distributed from the plan, the distributions received are fully taxable. So, if one had a choice between participating in a Roth Plan and a Thrift Plan, it is easy to tell that the Roth is better because no taxes will generally have to be paid when distributions are received and distributions from a thrift Plan are fully taxed when received.

I hope that answers your question. It has been my pleasure providing you with the answer to a question that many people would consider as esoteric.

Sincerely,

Herbie Glass, Certified Pension Consultant, MBA, CFP, ChFC, CFG, IAR, CLU

Glass Retirement Strategies, Inc. Bingham Farms, Michigan 248-647-2822

Comment   |  Flag   |  Jul 14, 2014 from Franklin, MI

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Peter Cacioppo Level 16

You said "Thrift Savings Plan". There is such a plan with this name that is offered to only employees of the Federal government. It is very similar to a 401(k) and all its investment choices have low operating expenses and management fees. If you are a Federal government employee, ask OPM to send you its information. You should participate fully in the plan and also follow other tenets in my Financial Guide on Brightscope:

Successful clients do certain things. 1. Pay themselves 20% of their Gross Salary every month by automatic programs through their 401(k) or IRA plans, and automatic credits to a brokerage account. 2. Borrow money only to buy a home. 3. Set aside money monthly to accumulate dollars to be used when cars should be replaced. 4. Pay all credit card bills in full every month. 5. Revise their Net Worth statement twice a year, so as to ascertain progress and boost incentives. 6. Fund generous college saving programs. 7. Learn how to enjoy life monthly with what dollars are left to spend. 8. Exercise and eat sparingly. 9. Shop wisely including appropriate negotiating. 10. They organize paperwork including recommended legal documents. 11. Never pay taxes today that can be deferred as laws and circumstances can change in the years ahead to reduce or eliminate the taxes.

Regards,

Peter T. Cacioppo, CFP 925-360-5570 Eagle Hill Wealth Management, Registered Investment Advisor www.EagleHillAdvisor.com La Jolla, CA

My LinkedIn page: http://www.linkedin.com/in/eaglehilladvisor

My Facebook pages: https://www.facebook.com/peter.cacioppo1 https://www.facebook.com/EagleHillWealthManagement

http://petercacioppo.tumblr.com

Comment   |  Flag   |  Jul 15, 2014 from La Jolla, CA

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I agree with the panel. It looks and acts very similar to a 401(k) plan, but designed for Government Employees. Unlike most 401(k)'s, the TSP is limited to five options (G,F,C,I, and S) so your overall choices from an investment perspective are limited. This should be taken into consideration when you look at your overall savings and asset allocation.

Comment   |  Flag   |  Jul 15, 2014 from Alpharetta, GA

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