For U.S. Government Employees, the Thrift Savings Plan Can Provide a Fantastic Means of Saving for Retirement.

When it comes to retirement savings, there are several options. For those in the private sector, a 401(k) is a common choice. However, if you work for the government, you should know that there’s another option available to you: the Thrift Savings Plan (TSP).

The Thrift Savings Plan was created in 1986 as part of the Federal Employees’ Retirement System Act, serving as an alternative for federal employees who want a 401(k)-type savings and investment plan. It’s also available to members of the uniformed services, including the Ready Reserve. Similar to a 401(k), your TSP contributions are tax-deferred until retirement. The amount you receive upon retirement heavily depends on your contributions and, if applicable, your employer’s contributions, making it a defined contribution plan.

How the Thrift Savings Plan Works

The TSP is designed to complement any Federal, Civil, or military retirement package. It’s managed by the Federal Retirement Thrift Investment Board (FRTIB), an independent government agency that collaborates with private companies to ensure proper administration, accurate record-keeping, and call center support. While there are call centers to help, your primary point of contact is still your employer.

There are annual limits on how much you can contribute to your TSP account. For 2014, the elective deferral limit is $17,500, the annual addition limit is $52,000 (including employer contributions), and there’s an extra $5,500 catch-up contribution limit for those aged 50 and over. You can also roll over traditional IRAs or other 401(k) plans into your TSP to benefit from low fees and a range of straightforward investment options.

In a TSP, your money is invested across five index funds, which vary in risk and return:
1. The C fund, investing in large companies.
2. The S fund, focusing on small companies.
3. The I fund, investing in international firms.
4. The F fund, concentrating on fixed-income investments.
5. The G fund, which includes low-risk government securities.

If you don’t actively choose your TSP allocations, your money will default to the G fund. While this fund generates interest, it doesn’t offer the growth potential of other funds.

Maximizing Your Retirement Package with TSP Investing

Investing for the long term means riding out short-term market volatility. The U.S. stock market has historically been a safe and rewarding place to invest retirement money. When you contribute small amounts regularly from each paycheck, the average cost of your investments balances out over time.

So, how do you maximize your retirement savings? Financial advisors generally recommend avoiding the G fund if you’re starting young. Instead, they suggest investing mainly in the C fund, with smaller portions in the S and I funds to boost your returns.

Ultimately, your choice depends on your comfort with risk and the returns you seek. Staying overly conservative can limit your growth significantly over the years.

Comparing a 401(k) to a TSP Account

There aren’t many differences between a 401(k) and a TSP. Both have similar contribution limits. However, TSP funds are simpler and can be beneficial for those unfamiliar with the stock market or who prefer not to track fund performance closely. Also, TSP fees are generally lower, potentially costing you less than a 401(k).

Using the TSP to save for retirement is a smart way to build a substantial nest egg. Many find it superior to a private 401(k) due to its simplicity and lower fees.