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Learning about Thrift Savings Plans

Learning about Thrift Savings Plans

Are you a government worker? If yes, the government has made a system where you can start saving for retirement known as the Thrift Saving Plan. 

These savings are paid as contributions for retirement, specifically for federal government employees and some uniform workers. The plan was initiated in 1986 by the Federal Retirement Thrift Investment Board as a branch of the Federal Employee Retirement System (FERS) system. 

The system is similar to a 401(k) plan with an opportunity for taxpayers to invest in their retirement. Many funds are available for sale, which taxpayers can pay directly from their accounts. Consistency contributions can get you a 5% interest. 


How a Thrift Savings Plan (TSP) Works

There are many benefits attached to Thrift Saving Plans, such as agency matching and payroll contributions. Taxpayers can convert their account to a traditional TSP where the income is not taxable until it is withdrawn. There is also an option to invest in a Roth TSP. The option enables taxpayers to remit their tax charges ahead of time, so their retirement funds do not get taxed when withdrawn. Either way, TSP accounts are limited to $20,500.


Thrift Savings Plans Investment Funds  

There are five core investment options out of the fifteen available options as a TSP participant. The core five are risky funds because they are exposed to the market. However, none of the five funds is subjected to inflation.  

Below are the five core funds:

  • Government Securities Fund (G): the G fund attracts no risk, and you’ll surely get interest from investing in government securities through TSP. 

  • Fixed Income Fund (F): this type of fund has a low risk and a fixed fund authorized by BlackRock’s U.S. Debt Index Fund and the Bloomberg Barclays U.S. Aggregate Bond Index.

  • Common Stock Fund (C): the C fund is exposed to higher risk and belongs to BlackRock’s Equity Index Fund. But it creates an opportunity to invest in equity indices. 

  • Small Capitalization Index Fund (S): the S fund is organized by BlackRock’s Extended Market Index fund and ranges from small to medium sizes. 

  • International Stock Market Index (I): the I fund is stock in developed countries through BlackRock’s EAFE Index.


Besides the core five funds, the remaining ten are L funds. The L fund provides five core funds to suit a retirement plan. These funds are suitable for those that want nothing to do with managing their account and have no interest in asset allocation. The plan is tagged according to a retirement year. For instance, L2025 is for those retiring between 2021 and 2017, while those retiring in 2043 and 2047 are categorized as L2045. 

The balance is recalculated every three months. Thus, the profile risk changes as years draw close. That is, a farther retirement account will attract lesser risk and a better position to enjoy the S and I funds, unlike those closer. These are index funds, meaning they are not fully qualified for equities investment. Rather, they are used to monitor the performance of these equities. 


Pros And Cons

Pros are;

  • These savings are the best option for a federal retiring employee because of the low risk and easy accumulation of savings.

  • Unlike other investments like Vanguard, these funds are easily managed and have the lowest expense ratios.

  • The G fund is a government security fund that excludes it from a volatile economy, meaning investors are guaranteed interest.

  • TSP loans have low interest, creating opportunities to use some funds from the account for emergencies or home building.


Cons are;

  • Since the scheme focuses on multiply savings, it’s not completely true because some funds are index funds.

  • Unlike other retirement plans, the program only allows a 5% increase, creating fewer chances.


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