savings

What You Need to Know About the Thrift Savings Plan

As the federal government becomes a good source of jobs, more people are likely to be introduced to this retirement-savings account for federal employees.

I invested in my former employer's 401(k) plan for years, then lost my job. I now work for the federal government and have the opportunity to invest in the Thrift Savings Plan. How does this plan work, and can I roll my 401(k) money into it?

The Thrift Savings Plan is a lot like a 401(k) for federal employees and members of the military, and many more people are likely to be introduced to it over the next year or so, as the federal government becomes a good source of new jobs in this economy.

As with a 401(k), your contributions to the TSP lower your taxable income and grow tax-deferred until retirement. Many federal employees get an employer match (it generally depends on the retirement system you belong to), although most members of the military do not. The contribution limits are similar to those in a 401(k) -- you can contribute up to $16,500 to the Thrift Savings Plan in 2009, plus an extra $5,500 in catch-up contributions if you're 50 or older. (Members of the military who are deployed can contribute all of their tax-exempt combat-zone pay, as long as their total contributions for the year don't exceed $49,000). You'll generally have to pay a 10% penalty - as you would with a 401(k) -- if you leave your job before age 55 and withdraw the money (there is an exception for eligible military reservists called to duty for more than 179 days).

You can roll your 401(k) money into the Thrift Savings Plan, which may be a good idea because it has incredibly low fees (18 cents to 19 cents a year for every $1,000 invested for most of the funds, which equals just $18 or $19 a year in investment-management fees on a $100,000 portfolio). Pre-tax money in a traditional IRA, 403(b) or 457 can also be rolled into the TSP.

Instead of providing a selection of well-known funds, the TSP offers five index funds, including ones that invests in large companies (called the C fund), small companies (S fund), international firms (I fund), fixed- income investments (F fund) and government securities (G fund).

Or you can opt for one of the Lifecycle funds, which builds a diversified portfolio of the other funds to match your retirement time horizon. A Lifecycle fund (called an L fund) starts out with more money invested in stock funds -- when you have many years before you plan to touch the money - then gradually become more conservative as your goals get closer. The fund automatically adjusts the investments every quarter, so you don't need to make any changes. You should pick the Lifecycle fund with a target date closest to when you plan to start withdrawing the money. Visit the L funds page at TSP.gov to see how the allocation becomes more conservative as time passes.

Visit the "Returns and Share Prices" page of the Thrift Savings Plan Web site for each fund's returns. See the "TSP Fund Information Sheets" for details about each fund.

You can keep the money in the TSP after you leave your federal job to benefit from the low fees, or you can roll over the money into an IRA or a new employer's 401(k), 403(b) or 457. You must start taking required minimum distributions from the TSP after you turn 70 ½ or the year you leave federal service, whichever is later (the minimum-distribution requirement was waived for 2009, just as it was for IRAs and 401(k)s). For details about the TSP withdrawal requirements, see "Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions."

For more information about the TSP, click on "Forms and Publications" on the TSP.gov page, then "Publications," then "Booklets," then "Summary of the Thrift Savings Plan."

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