401(k)s vs. TSPs

Thrift savings plans and 401(k)s are both employer-sponsored retirement plans that help employees sock away more money for retirement than they would otherwise be able to contribution on their own. Though TSPs are only offered to government employees and 401(k)s are only offered by for-profit employers, the two plans have much in common.

Contribution Limits

TSPs and 401(k) plans have the same contribution limits each year. As of 2013, you can't defer more than $17,500 to either plan. However, if you're 50 or older by the end of the year, you get to make an additional catch-up contribution of up to $5,500, which boosts your maximum contribution to $23,000. Plus, your contributions plus your employer's contributions can't total more than $51,000.

Employer Matching

With a 401(k) plan, your employer has discretion with regard to whether, and to what extent, to match your contributions. For example, your employer could match all your contributions, a fraction of your contributions or all your contributions up to a certain percentage of your salary. With a TSP plan, your agency automatically contributes 1 percent of your salary regardless of how much you contribute. In addition to that, your contributions are matched dollar-for-dollar, up to 3 percent of your salary. Then, contributions between 3 percent and 5 percent of your salary are matched at 50 cents per dollar you contribute. The matching contributions stop after you reach 5 percent of your salary.

Tax Benefits

Both 401(k)s and TSPs offer both traditional and Roth accounts. In a traditional TSP or 401(k), the contributions aren't included in your taxable income when you deposit the money, but you are taxed on distributions. Roths are quite different: you don't get a tax break for contributing, but your qualified withdrawals come out tax-free. However, the matching contributions are always made to your traditional TSP or 401(k) account, even if you contribute to a Roth TSP or 401(k).

Vesting

TSPs and 401(k)s can have different vesting requirements for keeping your matching contributions after you leave. In both plans, you're always vested in your contributions, so you won't lose them no matter how short your service with the employer. Your 401(k) matching contributions must vest fully after three years of service or gradually over six years, but your company can use a shorter period if it wants. With a TSP, most contributions vest after three years of service. But, if you're in Congressional and certain other non-career positions, the matching TSP contributions vest after two years.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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