The federal Thrift Savings Plan was created in 1986 to give government employees, including members of the military services, supplemental retirement savings. It's similar to 401k programs offered by private employers. However, it offers many advantages, including lower administrative costs and attractive investment options, including a government securities fund guaranteed against loss. It also now offers two tax options, traditional and Roth, just like private retirement programs.
An employee or service member can contribute up to $17,000 a year, as of 2012, with an overall cap -- counting agency contributions -- of $50,000. For military members, that does not count contributions from tax-exempt pay while serving in a combat zone. Employees over age 50 are permitted another $5,500 a year in "catch up" contributions.
Annual expenses for a TSP account are .03 percent compared to an average of 2 percent for the private 401k industry. That increases the percentage of money retained in the investment fund to earn interest. TSP also offers an option of "life cycle" investments, which become more conservative as retirement approaches to guarantee keeping more money in the fund.
A basic TSP account is tax-deferred, meaning that contributions are exempt from personal income tax when they are made. Withdrawals, starting at age 59 1/2, are taxed at the account owner's tax rate at that time. This gives a tax benefit during working years, with taxes paid after retirement when income and taxes generally are lower. Agencies can contribute matching funds to these accounts, but that amount will vary by employer.
A recent addition to TSP is a Roth program. Like a Roth individual retirement account, contributions are taxed before they are made, but withdrawals, including earnings, are tax-free. Government agencies cannot contribute to a Roth TSP, because there's no provision for them to pay taxes on that money, but an employee can hold two accounts, one for agency funds and the other for Roth contributions. The Roth benefits younger employees, who can expect incomes to grow over the years.
TSP contributions are invested in a G fund of guaranteed government securities unless an employee chooses another option. Four other options are "index" funds, three tied to bond or stock market indexes in the United States and one to international stocks. A fifth option is "life cycle," which allocates money among the other five funds, shifting percentages to more conservative and fund-preservation investments as retirement approaches.
- Glass jar with change and Retirement label image by torben from Fotolia.com