When it comes to saving for retirement, it's nice to have options. Saving money that will last for 20 or so years isn't easy and relying on social security isn't desirable (especially for younger generations who might not even have access to it when they retire). TSP funds are available to help federal and uniformed employees prepare for retirement.
TSP funds—or thrift savings plans—offer both saving and investment. Here's how it works and who it works for.
TSP funds, explained
TSP funds are available for two types of U.S. citizens:
- Federal or civil employees
- Members of the uniformed services (including the Ready Reserve)
Congress launched the Federal Employees' Retirement System Act in 1986 and TSP funds came with it. Since employees of private companies have access to 401(k) funds, federal and uniformed employees get their own equivalent.
Like a 401(k), you contribute to your TSP fund over the course of your employment. Some federal employees also receive contributions from their agency or service, similar to a 401(k) employee match.
TSP funds are watched over by the FRTIB (Federal Retirement Thrift Investment Board).
TSP funds pay disappearing dividends
TSP funds are made up of both saving and investing techniques. Some aspects of the fund come from stocks that pay dividends. These dividends are set to automatically reinvest into the security, so the TSP fund receiver doesn't see them. This is called a "disappearing dividend," but rest assured that the dividends aren't actually disappearing. They're doing the hard work of helping to compound your investment.
When can someone withdraw their TSP fund?
This is where TSP funds really differ from 401(k) and IRA plans. TSP fund holders are required to withdraw a portion of their account starting at the beginning of the calendar year of the individual's 72nd birthday. This is a RMD (required minimum distribution).
Prior to the RMD date, you might be subject to taxes. Early withdrawals when the employee is still in service or before the RMD might incur taxes at the ordinary income rate.
Ticker symbols that track the five TSP investment funds
There are five options for investments with certain ticker symbols that track the indices:
- G Fund: Government Securities Investments (no ticker symbol tracked this)
- F Fund: Fixed Income Index Investments (AGG, VBMFX)
- C Fund: Common Stock Index Investments (SPX, VFINX)
- S Fund: Small Capitalization Stock Index Investments (VEXMX, DWCPF)
- I Fund: International Stock Index Investments (EFA)
What are TSP Lifecycle funds and how do they work?
Lifecycle (L) funds consist of 10 funds that are made up from the five core funds listed above. This lets TSP fund recipients customize their return expectations, risk tolerance, and time horizon by redistributing the investments. It's like a target date fund and can be viewed as another type of FOF (or fund of fund, a hedge fund replica).
As L funds near their target dates, they automatically adjust risk lower. Regardless of market behavior, L funds maintain their allocations for the full quarter.