Thrift Savings Plans and The Investment Fund Allocation Choices
As with all things, understanding the Big Picture can help tremendously in your financial goals.
A Thrift savings plan, or commonly known as TSP, is a retirement program offered to Federal Employees. A Thrift Savings plan allows the employee to contribute dollars towards their retirement on a tax deferred basis. Any dollars the employee contributes now into the plan is not taxable until taken out. The Agency will automatically contribute 1% of the employee’s wages to the plan regardless if the employee contributes to their own plan. If the employee contributes money to their plan the agency will match dollar for dollar up to 3% of the employee’s contribution and the next 2% is matched 50 cents on the dollar. So what does all this mean? Bottom line, if the employee contributes 5% the agency will match 5% as well when you include the automatic matching of 1%. So it would be wise for an employee to contribute at least 5% percent of their wages in order to take advantage of the full matching. The employee would literally be doubling their money by doing so. The TSP does allow for an employee to contribute more than 5% but the matching is capped at 5%. It is a good idea to check with the agency each year to see what your maximum contribution limits are.
The Thrift Savings Plan offers several choices of investment allocations. The choice of investment funds are G, F, C, S, I, and five L funds.
- G- fund government securities
- F-fund fixed income
- C-fund common stock which would be S&P 500
- S-fund is small to medium sized companies.
- I-Fund International stocks
- L-funds consist of four target date funds which automatically adjust the risk level of the portfolio based upon the target date which would be close to the date that the employee plans on retiring. The fifth L-fund is an income fund designed to produce income for someone who might already be retired and is looking for income now.
When you decide to retire you do have the option of doing a direct rollover to a traditional IRA without a tax consequence, which would allow you many more investment options in order to address specific goals and parameters you are trying to accomplish.
As always you should consult an independent financial advisor to help with these decisions. If you would like more information on these topics or others feel free to contact us toll-free at 1-877-213-7233 or at email@example.com.