Thrift Savings Plan

What's the difference between FERS and a thrift savings plan?

Find out the difference between FERS and Thrift Savings Plan, and how retirement benefits are calculated.

3 min read

If you are a government employee, you have likely heard of the Federal Employee Retirement System (FERS). FERS is a retirement plan for all federal civilian employees, including employees working in the executive, judicial, and legislative branches of government. Employees covered by FERS may be eligible for various benefits, including the Thrift Savings Plan.

FERS is a retirement plan for federal civilian employees, while Thrift Savings Plan (TSP) is one of the components of FERS retirement. The other components of FERS include FERS basic annuity and Social Security. FERS basic benefit plan and Social Security pay fixed dollar amounts, while the amount you get from TSP will depend on the amount you contributed to the plan and how you invested your money.

What is FERS?

FERS is a retirement system for all US civilian federal employees who joined federal service on or after January 1, 1984. The plan came into effect in 1987, and it replaced the Civil Service Retirement System (CSRS). Federal employees are automatically enrolled in the plan, and they are eligible to receive benefits from three different sources when they retire.

Workers covered under FERS contribute a percentage of their salary to each FERS component i.e. Social Security, Thrift Savings Plan, and the FERS Basic plan annuity. Contributions to Social Security equals 6.2% of the employee’s wages, while FERS basic pension contributions range from 0.8% to 4.4% of salary depending on the year you were hired; you can contribute up to 5% to TSP to get a 5% match for a total of 10% contribution.

How much benefits will FERS provide?

FERS pension is determined based on an employee’s High-3 average salary and years of creditable service. This benefit is calculated by taking 1% per year of service.

If an employee has 35 years of credible service, the pension amount will be 35% of their high-3 average salary. If an employee is above age 62 and has at least 20 years of creditable service, the pension benefit will be calculated by taking 1.1% for every year of service i.e.

For example, suppose Jack retired at age 62 with 30 years of creditable service, and his High-3 average salary is $60,000. The monthly FERS pension will be calculated as follows:

= (33 x 1.1% x $60,000)/12

= $1,815

What is Thrift Savings Plan?

A Thrift Savings Plan is a retirement plan that is available to US civilian federal employees and unformed service members. It is similar to a 401(k) plan, and it offers many of the benefits available to private-sector employees.

TSP was established in 1986 through the enactment of the Federal Employees Retirement System. It allows federal workers to make tax-deferred contributions to the retirement plan, and only pay income taxes when they make a withdrawal. Federal employees may also get access to a Roth TSP plan, which is funded with after-tax dollars, meaning taxes have already been taken out of the contributions.

Benefits provided under FERS retirement

FERS retirement comprises the following components:

The basic benefit plan

Federal employees have access to the FERS Basic Benefit Plan, which allows them to contribute 0.8% to 4.4% of their salary to the plan. Once an eligible employee retires, the plan pays a fixed monthly pension.

When calculating the basic benefit amount, FERS considers several factors i.e. your years of creditable service, your High-3 salary, and the pension multiplier. The High-3 average is the average of the highest basic pay from 36 consecutive months of employment before retirement, or another consecutive 36 months of employment with the highest average base pay.

The formula for calculating the basic benefit plan is as follows:

Annual Pension Benefit: High-3 Salary x Years of Creditable Service X Pension Multiplier

Social Security

Federal service employees contribute to the Social Security Fund at the same rate as private sector employees. Employees pay 6.2% of their paycheck to the fund, with the federal agency matching this contribution.

Once you retire, you can claim Social Security benefits starting from age 62 or at your full retirement age. The amount of benefits you receive depends on the amount of income you earned over the years and how long you worked in the job covered by Social Security.

Thrift Savings Plan

TSP was created in 1986 as part of FERS Retirement. Federal employees covered under FERS and CSRS are eligible to enroll in TSP, including employees hired before the retirement plan was established.

Employees may have a choice between traditional TSP and Roth TSP. A traditional TSP plan allows participants to make tax-deferred contributions to the plan, and the money grows tax-deferred until when it is withdrawn. On the other hand, a Roth TSP plan allows participants to make after-tax contributions to the plan, and the money grows tax-free over the years. Participants can invest these contributions in a variety of funds.  

How much will your Thrift Savings Plan Provide?

TSP is a defined contribution plan, and this means you won’t receive a pension like FERS basic annuity and Social Security. The TSP funds available when you retire will be based on the funds you invest in, how much you contribute to the plan, the employer’s match, and the external market conditions. Generally, TSP has five main funds you can invest in i.e. G Fund, F Fund, C Fund, S Fund, and I Fund.

Federal employees may be allowed to make in-service withdrawals from the plan when they are still working. If you have separated from government service, you can choose to receive a partial distribution of at least $1,000 or take a full distribution. The distributions you take will be subject to federal income taxes, and an early distribution penalty tax if you are not yet 59 ½.