The Thrift Savings Plan

Thrift Savings Plan (TSP) is the "401K" for US Government employees.  401K accounts are named after the section 401K of the Internal Revenue Code which established them.  401Ks differ from a pension in several ways, but one in crucial to understand.  

A pension is a "defined benefit plan" meaning, if you've earned the right to a pension and you remain alive, you know exactly what you'll be paid each month from the pension; the benefit is defined.  The required contribution to make that benefit is up to the company to figure out.  In order generate to money to fund retiree pensions, the employer places that money in the market and the company assumes the market risk. 

A 401K is a "defined contribution plan" meaning you and the company (if they match) toss money into the retirees account.  The contribution is defined (the company matches funds on defined, knowable way), but the benefit the retiree sees at the end is not defined; it is subject to market risk and the employee assumes the market risk

  • A quick aside about market risk - all we mean by saying ‘market risk’ is that the stock market is a volatile place.  At times, prices sag or even crash.  Identifying who is assuming that risk is critical and, with the defined contribution 401K, it's you. This is why many employees - if given the choice - would prefer a pension-based retirement plan over a 401K.

When 401Ks were introduced in the 1980s, companies began phasing out pensions and using 401Ks as the primary way to help their employees save for retirement.  This was good in that it gave employees more control over what investments their retirement savings was being invested in.  However, along with that control was the obligation to ensure those investments returned enough to provide a satisfactory retirement. 

Many employers added matching funds to employee saving as they phased out those pensions; for military members, there has traditionally been no employer match since career military still can access a pension passing 20 years.  In another section of the site, we discuss Blended Retirement System, which is the military's first move away from pensions and toward a 401K-based retirement.

Below we'll discuss the significant tax benefits of 401K investing with TSP, introduce a 'Roth' version of the TSP with slightly different rules, and detail a prime advantage of TSP other other 401Ks: low fees.  

 

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Tax Advantages

401K investing allows you to save in a 'tax-deferred' manner, meaning the interest, dividends, capital gains from the investment are not taxed in the year they are earned, but instead taxed when the funds are withdrawn in retirement.  That means those funds can continue earning compound interest for years or decades, a big benefit over taxable accounts.  Additionally, you are able to reduce your taxable income for the year by every dollar you save into your 401K, because your contributions are pre-tax.  That means saving $10K in your 401K will yield a $2.5K bump in your tax return.

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Roth TSP

TSP's Roth 401K differs from a traditional 401K in one important way.  The contributions the a Roth TSP are contributed post-tax, so you don't get the tax refund boost when filing that year's return; instead your withdrawals are tax-free, meaning you avoid a tax bill in retirement.  Every cent in your Roth TSP account will be yours on withdrawal - no need to pay taxes.

Deciding whether to opt for the Roth TSP or the traditional TSP then is a bit of a 'pay now or pay later' proposition. 

This article does a pretty good job of explaining the differences:

https://www.fedsmith.com/2017/11/26/whats-better-tsp-roth-tsp/

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Ultra-low Expense Ratios

TSP has a limited number of funds to choose from and they simply track market indexes, limiting investor choice and ability to specialize.  What TSP lacks in variety, it makes up for in its industry-leading expense ratios