Be cautious before making hasty decisions about withdrawing from the Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP) is a popular retirement savings option for federal employees, offering a variety of benefits and features. Here's a breakdown of some key aspects of the TSP.
Costs and Expenses
For every $1,000 invested in the TSP, participants are charged a net administrative expense of $0.36 per year. This means a $500,000 investment will incur an expense of $180 per year while it is invested in the TSP. A low 3-cent fee is paid to TSP investment managers per $1,000 invested, amounting to $15 per year on a $500,000 account balance.
Withdrawal Options
When it comes to withdrawing TSP funds, participants with both traditional and Roth balances have several options. They can choose to have distributions paid proportionally from each balance, or opt for a distribution from the traditional balance only or the Roth balance only.
Distribution Options
The TSP offers several distribution options, including electing a series of scheduled withdrawals to receive income without giving up control of your account. This allows you to plan your retirement income according to your needs.
Comparing the TSP
The TSP has developed a seven-question "scorecard" titled "Keeping Score" to help compare the TSP with other plans that accept tax-advantaged retirement savings, such as an IRA. The questionnaire offers questions that you should ask to see how another plan measures up with the TSP.
Protection of Funds
One of the advantages of the TSP is that it protects your funds from creditors' claims. This provides peace of mind for participants, knowing that their retirement savings are secure.
Rollovers and Transfers
If you decide to move your TSP funds to other eligible retirement accounts such as an IRA or other employer plan, the TSP has prepared a fact sheet titled, "Rollovers from the Thrift Savings Plan to Eligible Retirement Plans," to guide you through the process. In the case that an IRA or plan does not accept tax-exempt balances, the tax-exempt portion of an intended rollover will be paid directly to the participant.
Lower Costs in the Private Sector
Private sector index funds generally have a lower expense ratio compared to the TSP's C, S, and I Funds. If you want to invest in index funds with a lower expense ratio, consider moving some TSP money to an outside investment. Lower costs are available for investors who opt for self-directed funds in the private sector, as opposed to engaging an advisor to manage the assets.
Recommended Private Sector Index Funds
Five low-cost private sector index funds recommended by five Certified Financial Planners (CFPs) experienced in working with government employees and retirees are:
- Vanguard Total Stock Market Index Fund
- Fidelity ZERO Total Market Index Fund
- Schwab S&P 500 Index Fund
- iShares Core MSCI Total International Stock ETF
- Vanguard Total Bond Market Index Fund
Profit-Free Investments
It's worth noting that the TSP makes zero "profit" from your investments. This ensures that your savings are working solely for your retirement goals.
Leaving Federal Employment
For employees who may face the end of their federal careers in 2025 under Deferred Resignation Programs (1.0 and 2.0) or VERA/VSIP early retirement offers, or a RIF (Reduction in Force) notice, the TSP has prepared a new fact sheet titled, "Information for TSP Participants Leaving Federal Employment." This fact sheet provides useful information for navigating the TSP during these transitions.
In all, the TSP offers a secure, cost-effective, and flexible retirement savings option for federal employees. With careful planning and consideration, you can make the most of your TSP investments to secure a comfortable retirement.
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