Thrift Savings Plan (TSP) Definition
The Federal Employee’s Retirement System Act of 1986 regulates thrift savings plan (TSP) that is a kind of retirement savings plan. This plan is made for federal employees as well as members of the uniformed services such as the Ready Reserve. A thrift savings plan is a defined-contribution plan that offers federal employees a few yet similar retirement privileges as the private sector employees.
How a Thrift Savings Plan Works
TSP benefits can involve agency matching contributions, catch-up contributions and automatic contributions. Federal workers have the option to put tax-deferred contributions in a conventional thrift savings plan. It means that the amount in the account won’t be taxable until the employee makes the withdrawal. Traditional TSPs operate just like employer-sponsored 401(k) pension plans.
Besides traditional TSP, employees can also select a Roth TSP for making investments. This enables them to contribute post-tax money in the account, and have the advantage of tax-exempted withdrawals. Employees can also contribute their 401(k) and IRA assets into a thrift savings plan, and vice-versa once they complete the tenure of their federal employment.
A thrift savings plan and Roth TSP proffers six types of funds so as to enable federal employees in investing their savings. These funds comprise of a combination of securities, and include the Government Securities Investment Fund (G), the Fixed Income Index Investment Fund (F), the Specific Life Cycle Funds (L), the Common Stock Index Investment Fund (C), the Small Capitalization Stock Index Fund (S), and the International Stock Index Investment Fund (I).
The above-mentioned funds are index funds that are controlled by BlackRock Institutional Trust Company under the Federal Retirement Thrift Investment Board (FRTIB). It is responsible for controlling and regulating the thrift savings plan. And, 5 official boards members and one executive director manage FRTIB. This agency solely manages the TSP, and ensures to operate in favor of beneficiaries and investors. Considering this aspect, we can say that a TSP varies from a 401(k) as a public entity administers it, and not the employer or the parties involved.
Index funds in the thrift savings plan tend to give the same returns as per their corresponding benchmark index. For instance, an investment of the C fund is made in a stock index fund taking inspiration from the S&P 500 Index, that comprises of stocks of 500 medium to big-sized organizations based in the United States. And, the investment of L funds is made in 5 different TSP accounts. The time horizon of the investor influences the allocation of asset, and that’s why this fund is called the life cycle fund.