Is the TSP a 457 Plan? Key Differences to Know

Public sector employees are often presented with retirement savings plans that seem similar on the surface. The Thrift Savings Plan (TSP) and the 457 plan are two such options, both designed to help government workers save for their future. This common purpose can lead to confusion about their relationship and whether they are the same type of account. The distinctions between them are significant, impacting everything from contributions to withdrawals.

The Thrift Savings Plan Explained

The Thrift Savings Plan, or TSP, is a defined contribution retirement savings plan specifically for federal government employees and members of the uniformed services. It functions as the federal government’s version of a private sector 401(k) plan. Participation is open to a wide range of federal workers, including civilian employees in all branches of government and members of the military, including the Ready Reserve.

Participants can direct their contributions into two different tax-advantaged accounts: a Traditional TSP and a Roth TSP. Contributions to the Traditional TSP are made on a pre-tax basis, which lowers a participant’s current taxable income. The invested funds grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. The Roth TSP option allows for after-tax contributions, meaning there is no immediate tax deduction, but qualified distributions in retirement are tax-free.

The TSP offers a focused selection of investment funds, identified by letter.

• G Fund (Government Securities Investment Fund)
• F Fund (Fixed Income Index Investment Fund)
• C Fund (Common Stock Index Investment Fund)
• S Fund (Small Cap Stock Index Investment Fund)
• I Fund (International Stock Index Investment Fund)

Additionally, the plan provides Lifecycle (L) Funds, which are target-date funds that automatically adjust their investment mix to become more conservative as the participant’s target retirement date approaches.

Understanding 457 Plans

A 457 plan, specifically a governmental 457(b) plan, is a non-qualified, tax-advantaged deferred compensation plan. These plans are typically offered to employees of state and local governments, such as public school employees, police officers, and firefighters. Certain tax-exempt, non-governmental organizations may also offer 457 plans to their employees.

Similar to other retirement plans, contributions to a 457(b) are made through payroll deductions, and many plans offer both Traditional (pre-tax) and Roth (after-tax) contribution options. With the Traditional 457(b), contributions reduce current taxable income, and both contributions and earnings are taxed upon withdrawal. If a Roth 457(b) is available and chosen, contributions are made with after-tax dollars, and qualified withdrawals are not taxed in retirement.

The investment options within a 457(b) plan vary depending on the specific plan provider selected by the government entity. Unlike the TSP’s uniform fund lineup, a 457(b) plan might offer a broader menu of mutual funds and other investment vehicles from various fund companies. The administration and features of these plans can differ from one employer to another.

Core Distinctions Between TSP and 457 Plans

The Thrift Savings Plan is not a 457 plan; it is a qualified retirement plan, much like a 401(k), established by federal statute. This difference in their legal and tax classification gives rise to several important distinctions. The plans are governed by separate sections of the Internal Revenue Code, which dictates their unique rules regarding contributions, withdrawals, and rollovers.

A major difference lies in their contribution limits. Both the TSP and 457(b) plans have their own annual contribution limits set by the IRS, which are independent of each other. For 2025, the general contribution limit for a TSP is $23,500, and a governmental 457(b) plan has its own separate limit of $23,500. This independence allows an individual eligible for both plans to contribute to both simultaneously.

Both plans also offer catch-up contributions for older participants. For 2025, participants aged 50 and over can contribute an additional $7,500 to each plan. Governmental 457(b) plans have a separate special catch-up that allows participants to contribute up to twice the annual limit in the three years preceding their normal retirement age.

The rules for early withdrawals represent another primary difference. The TSP imposes a 10% early withdrawal penalty on distributions taken before age 59 ½, but this penalty does not apply to payments received after separating from service during or after the year the participant turns 55. In contrast, distributions from a governmental 457(b) plan are not subject to this 10% penalty if they are taken after the employee separates from service, regardless of their age.

Rollover options also differ between the two. While both plans can be rolled over to other retirement accounts like an IRA or another employer’s plan after leaving service, the specifics can vary. For instance, the assets within a 457(b) plan are technically considered the property of the employer until they are distributed, which can have implications not present with TSP assets.

Contribution and Coordination Rules

The separate nature of the TSP and governmental 457(b) plans creates a financial planning opportunity for individuals who may be eligible for both. Because the contribution limits are not aggregated, an individual can contribute the full elective deferral amount to each plan in the same tax year. This allows for a significantly higher savings potential than contributing to a single plan alone.

An eligible employee could contribute the maximum amount to their TSP and also contribute the maximum to their 457(b) plan. For example, using the 2025 limits, a federal employee under age 50 who also works a part-time job for a local government could contribute $23,500 to their TSP and another $23,500 to their 457(b) plan. This results in a total potential retirement savings of $47,000 for the year from these two plans, not including any catch-up contributions.