Is TSP a 401(k) or 403(b)? Key Differences and Similarities
Understand how the Thrift Savings Plan (TSP) compares to 401(k) and 403(b) plans, including key similarities, differences, and its unique classification.
The Thrift Savings Plan (TSP) is a retirement savings program for federal employees and members of the uniformed services. Many wonder whether it functions like a 401(k) or a 403(b), as all three are tax-advantaged retirement plans. While they share similarities, key differences set them apart.
Understanding how TSP compares to employer-sponsored plans in the private and nonprofit sectors helps individuals make informed retirement decisions.
TSP’s Classification
The Thrift Savings Plan (TSP) is a defined contribution plan under U.S. law, created specifically for federal employees and uniformed service members. While it operates similarly to private-sector retirement plans, it is governed by the Federal Employees’ Retirement System Act of 1986 (FERSA) rather than the Employee Retirement Income Security Act of 1974 (ERISA), which regulates most private-sector plans. This distinction affects fiduciary oversight, investment options, and administration.
Unlike private-sector plans, the TSP is managed by the Federal Retirement Thrift Investment Board (FRTIB), an independent government agency. Instead of offering a broad range of mutual funds, the TSP provides a limited set of low-cost index funds:
– G Fund – Government securities
– F Fund – Fixed income (bond index)
– C Fund – S&P 500 index
– S Fund – Small- and mid-cap stocks
– I Fund – International stocks
These funds are designed to provide diversification while keeping costs low.
Federal employees can contribute up to the IRS annual limit, which in 2024 is $23,000, with an additional $7,500 catch-up contribution for those 50 and older. Employees under the Federal Employees Retirement System (FERS) receive agency-matching contributions: a dollar-for-dollar match on the first 3% of salary and a 50% match on the next 2%. Private-sector plans vary in their employer matching policies.
Similarities with 401(k)
TSP and 401(k) plans both allow pre-tax contributions, reducing taxable income for the year. Taxes are deferred until retirement withdrawals, when income may be lower. Both plans also offer a Roth option, where contributions are made with after-tax dollars, but qualified withdrawals—including earnings—are tax-free.
Contribution limits for TSP and 401(k) plans are identical, following IRS rules for defined contribution plans. In 2024, participants can contribute up to $23,000, with an additional $7,500 catch-up contribution for those 50 and older. Employers in both plans may provide matching contributions to encourage savings.
Both plans impose a 10% penalty for early withdrawals before age 59½ unless an exception applies, such as disability or certain medical expenses. Required minimum distributions (RMDs) begin at age 73 under current IRS regulations.
Similarities with 403(b)
TSP and 403(b) plans serve employees in government and nonprofit sectors, emphasizing cost efficiency and simplified investment choices. The TSP’s low expense ratios are comparable to the lower-cost investment options often found in 403(b) plans offered by public schools, churches, and tax-exempt organizations.
Historically, 403(b) plans focused on annuity contracts, though many now include mutual funds. The TSP also offers an annuity option, allowing retirees to convert savings into a lifetime income stream.
Both plans allow participants to borrow from their accounts under specific conditions, typically repaying within five years for general loans or longer if used for a primary residence. These loans are repaid with interest, which goes back into the participant’s account. While 401(k) plans also allow loans, they are less commonly used in nonprofit and government sectors.
Distinctions Among the Three
TSP, 401(k), and 403(b) plans differ in governance and regulatory oversight. While 401(k) and 403(b) plans fall under ERISA, TSP is governed by FERSA. ERISA imposes strict reporting and disclosure requirements on private-sector plans, while TSP follows federal regulations tailored to government employees.
Investment options also vary. TSP offers a limited selection of index funds, while 401(k) plans typically provide a wider range of mutual funds, including actively managed options. 403(b) plans historically focused on annuities but now often include mutual funds. These differences impact fees, risk exposure, and long-term growth potential.