Companies in the private sector can pick and choose the benefits that they provide to workers, but employees of federal government agencies have certain benefits in common. A Thrift Savings Plan is a retirement benefit available to federal workers that lets you stash some of your pay into an investment account on a before-tax basis. Wise use of a TSP can help you grow a bigger nest egg for retirement.
Maximize Contribution Matching
TSPs offer contribution matching, a system where your employer transfers some cash into your account on your behalf for each dollar that you save. According to TSP.gov, workers covered by the Federal Employees Retirement System are eligible for dollar-for-dollar matching on the first 3 percent of annual contributions and a match of 50 cents on the dollar on the next 2 percent. Saving at least 5 percent of your annual income in your TSP each year ensures that you get the most out of matching contributions.
Shoot for the Limit
It is a good idea to sock away enough cash to get any matching contributions you can, but you don't have to stop there. In 2013, Thrift Savings Plans have a general contribution limit of $17,500, so you can keep saving on a pretax basis up to that limit. If you are age 50 or older, you can save an extra $5,500 a year. Squirreling away any extra cash you have in your paycheck up to the limit cuts your taxes and helps you build your nest egg.
Avoid Early Withdrawals
TSPs are subject to many of the same rules that apply to retirement plans offered by private companies, including a 10 percent penalty on withdrawals made before age 59 1/2. It is important to avoid early withdrawals to make sure you aren’t hit with the penalty. Delaying withdrawals until you actually retire can help maximize tax savings, since your income tax rate may fall during retirement, allowing you pay less tax when you tap into your account.
Consider Roth Contributions
When you put cash into a TSP you can choose to make normal pretax contributions or Roth contributions. Roth contributions are subject to income tax in the year that you make them, but you generally don't owe any taxes when you take Roth funds back out of your account. Opting for a Roth TSP essentially lets you pay income taxes upfront so that you avoid taxes later on, which can be especially beneficial if your tax rate stays the same during retirement.
- TSP.gov: Managing Your Account
- TSP.gov: Withdrawals After Leaving Federal Service -- Your Options
- TSP.gov: Withdrawing Your TSP Account
- TSP.gov: Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions
- TSP.gov: Traditional and Roth Contributions
- TSP.gov: Contribution Limits
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.