Many people have a lot of concerns about saving enough money for retirement, especially given the current state of the economy and the issues with various pension plans. In truth, the very things that most people once thought were completely safe and would virtually guarantee their ability to live comfortably in retirement; have turned into sources of contention as they discover virtually nothing is safe when it comes to their personal finances. However, people that are employed within the government do have the option of enrolling in a Thrift Savings Plan. This is essentially the government’s version of a traditional 401(k), but there are some major differences. It is important to fully understand what these differences are in order to know if this is the right course of action for someone who is looking for a better way to save money for their retirement.
Differences Between a Thrift Savings Plan and a Traditional 401(k)
With a traditional 401(k), people put a certain amount of money from their paycheck into their retirement account for the duration of time that they are working. In many cases, employers will match that up to a certain amount, effectively doubling the amount of money that can be saved at any given time. The Thrift Savings Plan works in much the same way, allowing for TSP allocations that can also match an employee’s contribution to the retirement fund.
In most cases, an employer, which is the federal government in this case, will match an employee’s contributions up to 2%. From that point forward, the amount that is matched varies depending upon the amount of money that the employee is making and the specific type of plan that is selected. The maximum amount that can be matched is 5%. It is also important to note that the 5% will not be matched dollar for dollar. In other words, if an employee contributes 5% of their paycheck to their TSP fund, the government will not automatically contribute an additional 5% as well. Instead, a percentage is contributed by the government that corresponds to the amount of money that the employee is contributing to the plan at the time. This means that employees who want to have 5% contributed by their employer must contribute slightly more in order to reach that level. In addition, this option is typically reserved for individuals who have a number of years of experience and are thereby making more money than someone who is working in an entry level position for less wages.
The Basics of TSP Investing
Learning to invest with a Thrift Savings Plan is not really that different from learning to invest through other retirement plans. The biggest difference is the way that the funds can be accessed. There are essentially five different individual funds that can be used for investing with a Thrift Savings Plan. These include government securities and small capitalization stocks. In addition, individuals have the opportunity to invest in a variety of different indexes, ranging from the International Stock Index to the Common Stock Index and the Fixed Income Index. There are also different life cycle funds that can be used. While these are technically considered methods of automatic investing, they actually correspond far more to the way that the contributions are allocated to the individual’s portfolio.
Similarities Between TSP and a 401(k)
There are a number of important similarities between a Thrift Savings Plan and a regular 401(k). Perhaps the most important similarity is that both types of accounts can be rolled over into a traditional IRA account. This helps people who are striving to save the maximum amount of money for retirement, allowing them to utilize the plan that will work the best for them according to their individual circumstances. In addition, a TSP account is typically more secure than many other types of retirement accounts. As a result, the investments that are produced may be far more significant. Many people who work for the government are directly impacted by their ability to save enough money for retirement. The flexibility that is offered by various TSP allocations is important because individuals who have TSP accounts have more opportunities to protect their financial well-being.