The Thrift Savings Plan is a contribution strategy for federal employees in the US. It enables candidates to save money for the future through paycheck contributions. The funds can be used to build a diverse retirement portfolio for eligible candidates. TSP is a part of the Federal Employees Retirement System (FERS) benefits apart from the Basic Benefits and Social Security plans. Contributions to the TSP during the working years help to reduce taxable income from retirement savings. 

While there are several strategies to manage retirement funds, we will discuss the rules that stand out to maintain sustainable withdrawals. The 4% rule is a reliable framework for withdrawing retirement income while preserving the long-term growth of savings. 

Another method is the bucket strategy where participants split their retirement fund requirements into different timeframes. This plan helps to tailor investments based on periodic requirements. Investing in the Growth (G) Fund within the TSP is a great way to manage income for short-, mid-, and long-term needs. 

It is pivotal to consider that the market may regularly fluctuate. This poses a challenge to ensure liquidity relying solely on the 4% or bucket rule separately. 

However, combining these strategies is a powerful approach to optimize TSP withdrawals, reduce market risks, and ensure steady retirement income. 

The Thrift Savings Plan is a retirement savings program for US employees registered under the FERS plan. There are two types of TSP accounts. Here is an overview of the thrift savings plan traditional vs ROTH accounts –  

• Traditional TSP – Taxes are deducted during withdrawal from this type of account reducing the employees’ tax bracket at the time of retirement. 
• ROTH TSP – Tax is deducted at the time of contributions into this account. Therefore, the retirement withdrawals and earnings from the contributed money are tax-free under certain conditions. 

Key Features of TSP

Navigate through the promising features of TSP to maximize retirement savings – 

• Provides both types of tax deductions (pre-dollar and post-dollar) through two different TSP accounts. 
• TSP is an employer-driven plan offering a matching contribution of up to 5% of the employee’s salary. 
• TSP has low administration fees. 
• Allows flexible withdrawal of TSP funds through ROTH conversions, partial distributions, installments, or annuity purchases. 
• Remote mobile access to manage contributions, and investments, and determine retirement savings. 

Thrift Savings Plan Contribution Limits for 2025

The Internal Revenue Service in the US set the TSP contribution limits at $23,500 for participants under 50 years. Furthermore, a catch-up contribution limit is set for participants who are more than 50 years old. They can add $7,500 to their TSP accounts apart from the yearly contribution limit. Moreover, employers make matching contributions to the TSP accounts of federal employees. The annual limit for this type of contribution is set at $70,000. Also, participants who are within the age bracket of 60-63 years can make catch-up contributions of $11,250 into their TSP account. 

TSP Distribution Rules

There are multiple options for what a participant wants to do with their TSP funds after retirement or separation from federal services. Participants can keep the TSP funds as long as they wish. The federal government allows continuation of the TSP account as long as the employee has a minimum balance of $200 after separation from federal services. Find out the different types of TSP withdrawals and related rules – 

• Partial Distribution – A minimum of $1,000 can be withdrawn from the TSP account in this type of distribution. 
• Total Distribution – Complete withdrawal of TSP funds rendering the account balance nil in this type of distribution. 
• Annuity Purchase – TSP funds can be completely or partially used to purchase annuities. It is a type of monthly payment given to TSP account holders in exchange for the complete TSP funds. This process is irreversible. 
• Installment Payments – This option empowers participants to purchase annuities with a portion of the TSP while receiving installments from the TSP account. Installments will stop once the TSP account balance is exhausted. 

Thrift Savings Plan Funds for Investment

Participants can make the most of the following TSP funds to diversify their savings portfolio – 

• G Fund – Allows candidates to invest in government securities with stable returns and minimum risk of loss. 
• C Fund – Investors can contribute to common stock index funds of S&P 500 companies. 
• F Fund – A fixed-income index fund to capitalize on the bond market. 
• L Fund – Empower federal employees to allocate funds based on their retirement deadline. 
• I Fund – Diversifies invested money according to the conditions of the International stock index funds. 

Read Also: How To Become A ROTH IRA Millionaire in 2025?

The 4% rule is a financial guideline developed by financial planner William Bengen during the 1990s. The plan highlights withdrawing 4% of the retirement savings annually ensures a steady source of income for more than 30 years. 

It is a straightforward and consistent method to manage retirement funds. Federal employees, uniformed service members, and federal retirees calculate their withdrawals based on the annual inflation rate and total savings. 

Benefits & Drawbacks of The 4% Rule

Take a glance through the pros and cons of this rule for retirement withdrawals – 

• The withdrawal amounts are easy to calculate and maintain with negligible adjustments based on the inflation rate. 
• Maintains the long-term growth of savings in the TSP account ensuring peace of mind. 
• Withdrawals that are adjusted for inflation do not highlight drastic changes in living costs. 
• A downturn of the market during the early retirement stages may deplete funds faster. 
• Fixed withdrawals may not sustain the changing needs of different stages of retirement. 

The bucket strategy is a withdrawal plan to meet retirement goals. In this strategy, participants divide their savings and withdrawals according to specific time frames. It helps to meet their financial goals. Different phases of the bucket strategy include – 

• Short-Term – Invest in money market funds with low-risk assets to meet the immediate expenses for the upcoming 3 years. 
• Mid-Term – Contribute to moderate-risk assets including bonds and balanced funds for stable income for 3-10 years after retirement. 
• Long-Term – Invest in equities for more than 10 years for the long-term growth of funds to meet retirement expenses. 

Benefits of The Bucket Strategy

Some of the advantages of applying this savings strategy include – 

• Minimizes the risk of selling investments at a loss during market downfall. 
• Ensures availability of cash for immediate expenditure without affecting the long-term growth of investments. 
• Offers financial clarity and confidence by aligning asset allocation with retirement timelines. 

Importance of Combining The 4% Rule & Bucket Strategy

Implementing standalone plans introduces shortcomings. However, combining the 4% rule and the bucket strategy helps in the following ways – 

• A consistent rate for TSP withdrawal options in retirement. 
• The bucket strategy is ideal to cover short-term expenses while maintaining the long-term growth of investment funds within the TSP. 
• It minimizes the impact of market downfalls on TSP funds. 
• Protects short-term funds from volatile market conditions preventing forced withdrawals. 
• Gives an outline to rebalance TSP investments to capitalize on market conditions. 
• Liberate candidates to combine strategies to predict withdrawals and retirement time zones to ensure flexible planning. 

Merging the two rules enables retirees to navigate economic uncertainties and optimize TSP funds for a secure retirement. 

Read Also: Complete Overview of VA Disability Pay Raise in 2025

Find out about the different steps to integrate the 4% bucket rule for TSP distribution options – 

Assess Retirement & Withdrawal Requirements

Start your retirement withdrawal planning by determining the following factors – 

• Examine the annual living costs by considering housing, utilities, and miscellaneous expenses. 
• Remember to include one-time expenses such as home repairs or vacations. 
• Consult with financial advisors to get an accurate annual inflation rate to retain purchasing power. 
• Include healthcare and insurance expenses that may rise with age. 

Create Buckets

Check out the best tips to create buckets as per your retirement date and timely fund requirements – 

• Create a short-term bracket by investing in low-risk assets such as the G fund to protect them against market volatility and meet the expenses for the upcoming 1-3 years. 
• Address the expenses between 3-10 years after retirement by investing in TSP F and C funds for stable income and modest growth. 
• Create a bucket for long-term growth to support the expenses of 10 years post-retirement. Try investing in the C, S, and I funds within the TSP to enjoy compounding growth for meeting future requirements.  

Calculate Initial Withdrawal As Per 4% Rule

Here are the best tips to identify the first withdrawal from TSP funds according to the 4% rule – 

• Multiply the total TSP savings by 0.04 to find out the first withdrawal value. For example, a federal employee with $200,000 in their TSP account can make a first withdrawal of $8,000 in the first year.
• Always withdraw money from the first bucket to meet immediate requirements.   

Annually Rebalance Buckets

Glance through the best tips to maintain buckets to meet the ever-evolving financial requirements – 

• Add money into the short-term bucket from the remaining two as needed to manage fluctuating expenses. 
• Move a part of earnings/profits from bucket 3 into the other ones to keep them refilled. 
• Review the portfolio to mitigate risks and meet financial goals consistently. 

Get insights into the best tips to maximize TSP savings and optimize retirement withdrawals using the 4% bucket rule – 

Utilize TSP Calculator To Plan Withdrawals

• Utilize the TSP calculator to check how long the account balance will last according to your withdrawal rates and investment performance from the TSP account. 
• Compare differing scenarios such as market conditions or fluctuating annual expenses. 

Regularly Evaluate Fund Performances

• Compare the performance of the different TSP investment funds. 
• Ensure the allocations mitigate risks and meet the timeline for each bucket. 

Impact of Required Minimum Distributions on 4% Rule

Federal retirees need to take the required minimum distributions (RMDs) from their TSP account after a certain age. Failing to meet this criterion results in penalties. Check out how RMDs impact the TSP withdrawal rules – 

• Federal employees born after 1950 are required to take RMDs from their TSP accounts starting from the age of 73 years. 
• The RMDs may exceed 4% of the first TSP withdrawal. 
• Fulfill the RMD requirements along with withdrawals to minimize bucket fund disruptions. 

Align RMDs with Bucket Withdrawals

• Withdraw funds from overfunded buckets to meet RMD criteria.
• Reinvest excess withdrawals into taxable accounts to ensure savings growth. 

Analyze Market Fluctuations

• Reduce withdrawals or temporarily pause them during market downfalls to protect long-term buckets. 
• Rely on Bucket 1 to meet expenses during volatile times. 

Determine Long-Term Growth of Funds

• Time reassess the growth expectations to adjust fund allocations for retirement needs. 
• Consider moderate return assumptions for growth buckets to prevent overestimation of portfolio performance. 

Read Also: Complete Guide for HSA Contribution Limits in 2025

Explore from a list of mistakes that all federal employees should avoid at the time of withdrawal from TSP funds – 

• Assuming that TSP investment funds such as the C, S, and I will provide high returns only is a mythical expectation. Consider conservative growth estimates for long-term planning to chalk out false expectations. Also, participants can diversify their investments into different funds to balance growth potential and minimize risks. 
• Failure to consider inflation rates may deplete the purchasing power of withdrawals through the decades. Integrate an annual increase in the withdrawal amount based on rising inflation rates. Review and adjust this rate to adjust withdrawals as per the standard of living. 
• Ignoring annual withdrawal rebalancing strategies leads to overfunding or underfunding the account. Participants are advised to rebalance their withdrawals at least once a year. Reallocating excess earnings from a long-term bucket into a short-term bucket keeps it replenished without disrupting the withdrawal strategies. 

Effectively manage your TSP funds after retirement with a combination of the 4% rule and bucket strategy. 

This method helps to mitigate market risks, protect short-term funds, meet immediate expenses, and ensure long-term growth. 

Financial markets and personal situations constantly change. Therefore, it is essential to maintain a tailored strategy to ensure a consistent stream of retirement income. 

Consult with a federal retirement advisor in Puerto Rico to review buckets and adjust allocations according to market inflation rates. 

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