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Thrift Savings Plan (TSP) Ultimate Guide – 2023 Update!


Do you work for the government or the military and want to maximize your TSP? In this article, we’ll be discussing the top three TSP best practices that you can use to get the most out of your TSP.

What is a TSP?

The Thrift Savings Plan (TSP) is a retirement savings program created by the U.S. Government and administered by the U.S. Department of the Treasury. It is essentially a 401(k) plan for federal government employees. It allows eligible individuals to save for retirement by setting aside a portion of their income, up to a maximum amount, into a tax-advantaged savings account. Contributions to a TSP can either be pre-tax or post-tax.

Is TSP a 401(k)?

A Thrift Savings Plan is similar to a 401(k) but it is not directly regulated by the federal government. It is a retirement plan that mainly serves people working in the U.S. federal government, or at other agencies such as the Peace Corps. TSP is administered by the Employee Benefits Security Administration (EBSA). EBSA is an independent agency within the Internal Revenue Service, responsible for overseeing employee benefit plans such as 401(k)s and 403(b)s

Is TSP an IRA? 

A Thrift Savings Plan is not an IRA. Although they are both tax-advantaged retirement savings plans, the rules can differ significantly, and those who don’t know the differences can end up paying a price at tax time.

What are the contribution limits for TSP in 2023?

The TSP contribution limit for Federal workers and military personnel in 2023 is $22,500. This is an increase of $2,000 from 2022. If you’re 50 or older, your plan may allow you to contribute an additional $7,500 as a “catch-up” contribution. This means that you can contribute $30,000 in total. Active military members who are deployed in combat zones and receive tax-free income can contribute up to $66,000 in 2023. This has increased by $5,000 from 2022.

How do I maximize my TSP 2023? 

You will need to set up an elective deferral of around $865.40 per pay period if you want to make the maximum contribution of $22,500. If you are older than 50 then you are allowed to make catch-up contributions.

Tip #1: Don’t ignore the Roth TSP option

First off, make sure that you don’t ignore the Roth TSP option.

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Similarly, there’s a hidden gem that not many people know about right now in your TSP. What is it? The Roth TSP. Only about 18% of government employees are actually putting their contributions in a Roth TSP.

So what is the Roth TSP?

When you were first enrolled in your TSP, you most likely chose (or were defaulted into) the option to make Traditional TSP contributions, also known as Pre-Tax TSP contributions. Now, you’ll notice that — if you try to log in to your TSP portal, or fill out a form to change your contributions — there’s actually a Roth TSP contribution option. This allows you to make some or all of your TSP contributions after-tax and not just Pre-Tax. This is something to which you want to pay attention.

Why can switching to a Roth TSP contribution be a more lucrative way to save in your TSP?

Because any money that you contribute to your Roth TSP is going to grow tax-free.

For example, let’s assume that you put $10,000 this year into a Roth TSP, and through investing in market securities, you manage to grow it to $30,000 after 20 years. You essentially made $20,000 in investment gains during that time span. If those gains are in a Roth TSP and you take it out during retirement, you are not going to pay any taxes on it. Why is this? Because you already paid taxes on it before you contributed that money to your Roth TSP — hence why it’s called “After-Tax” dollars — and the beauty of the Roth TSP is that any money you make off of that initial After-Tax contribution will also be tax-free.

In contrast, if this same $30,000 is in a Traditional or Pre-Tax TSP, many government employees will usually pay about 24% in federal income taxes, plus applicable state taxes, on that money when you take it out during retirement.

Thus, by contributing to a Roth TSP, you’re paying taxes on the contributions now in order to have those contributions and the associated gains Tax-Free when you take that money out.

In summary, assuming that (1) you don’t need the tax break that comes with making Pre-Tax TSP contributions today and (2) you don’t expect to be in a lower tax bracket during retirement, making Roth TSP contributions is a great option to consider.

Tip #2: You’re allowed to contribute more than 5% to your TSP

Second, keep in mind that you can actually contribute more than 5% of your income.

The reason why this is important is that when you were first hired by the government or military and you started working, you were probably auto-enrolled in contributing either 3% or 5% of your salary to your TSP. And if like most people, you left it at that and didn’t make any changes manually, then that’s what you’re currently contributing today.

Thus, it’s important for you to know that if you want to, you can contribute up to $22,500 a year to your TSP, which is the annual limit for TSP contributions in 2023.

The reason why 5% is one of the most popular contribution rates is that 5% is the contribution rate at which you get the maximum employer match that’s provided by the government. In addition, if you’re a member of the military and you opted into the blended retirement system, you also get that same 5% match from the government.

Indeed, you may already know this but it’s important to take a moment to make sure you’re crossing your T’s and dotting your I’s because often when you’re working hard and not a financial expert, you just don’t know what you don’t know. For example, I was shocked to discover that one of my close friends didn’t realize she could contribute as much as $22,500, and if I had said something earlier then she could have been saving substantially more to her TSP for the last decade. That’s when this lesson hit home for me.

Tip #3: Be wary of the S Fund

Finally, our third best practice is to be careful of the S Fund.

For some context, there are effectively five different funds in your TSP.

There’s the G Fund which is the most conservative one; it’s invested in government securities. It doesn’t really go up and down a ton in value, but it’ll give you stable returns. The F Fund is the next step up on the ladder. It’s invested primarily in government securities and high-quality corporate bonds. The remaining three funds are stock funds. There’s the C Fund, which is invested in U.S. stocks, mostly those of large companies. There’s the I Fund, which is invested in international stocks that are listed abroad, mostly in Europe, Japan, and the Asia Pacific. Lastly, there’s the S Fund which is invested in small-to-mid-sized U.S. companies. And finally, there’s the L Fund which is a combination of the G, F, C, S, and I Funds.

If you look at Reddit posts or Google to see how other folks are allocating their TSP, you’ll find a lot of interest in the C Fund and the S Fund. The primary reason that people tend to like these two funds is that they’ve performed spectacularly over the last 10 years as our economy has been in a bull, or expansion, cycle. For example, in 2020 the C Fund was up by approximately 18% and the S Fund was up by approximately 19%.

However, focusing too much on past performance is like driving using a rearview mirror. When it comes to the market, history doesn’t inform future performance, and in fact, many people have gotten burned in investing that way.

What is important is to look ahead and, if you dig deeper, you’ll find that more than ⅓ of small US companies actually have negative earnings, which means they’re losing money. As a result, I would recommend being wary of the S fund and avoid focusing on its historical returns, particularly during the most recent bull mark.

What is TSP mutual fund window?

In June 2022, the Federal Retirement Thrift Investment Board released a mutual fund window (MFW) for TSP participants. As a result, investors now have more investment options within the TSP.  Through the TSP mutual fund window, TSP participants can invest some of their TSP savings in mutual funds outside the TSP. This option allows for more investment flexibility that was not previously available to TSP participants. TSP participants must meet certain eligibility requirements before investing in the mutual fund window, but if they do meet those requirements, they can choose to move some of their money into this window

Additional questions you may have: 

– What TSP fund is best? 

The answer to this question depends on your risk tolerance and how close you are to retirement. The G and F Funds are bond funds, which means they are relatively safe investments, but the expected return will be low. The C, S, and I Funds are stock funds, which means it will go up and down significantly in any given year (up to +/- 40%). Over the past 10 years, the C and S Fund’s average annual return was above 16%, while the I Fund returned around 8%. But remember, past performance is not a guarantee of future performance. 

– What is bad about TSP?

If you withdraw money from your TSP before you are 55 years old, then you typically have to pay taxes and a 10% penalty (some exceptions apply). TSP is a defined contribution plan which means that withdrawals are not guaranteed for life once the retiree starts withdrawing. Therefore, a TSP account could be depleted before the participant dies. It’s important to think about how much you will need for retirement to make sure that you are saving enough.

– What TSP fund should I invest in? 

The TSP has 6 different investment options.  

  1. The Government Securities Investment (G) Fund: invests in government bonds.
  2. The Fixed Income Index Investment (F) Fund: invests in government and high-quality corporate bonds.
  3. The Common Stock Index Investment (C) Fund: holds large-company U.S. stocks.
  4. The Small Capitalization Stock Index (S) Fund: invests in small-company U.S. stocks. 
  5. International Stock Index Investment (I) Fund: invests internationally (Europe/Japan)
  6. Lifestyle (L) Fund: invests in the other five funds and becomes more conservative as employees approach retirement.

Each fund offers different advantages and disadvantages. The most important consideration in choosing funds is how much risk you are willing to take with your money. This will be dependent on how close you are to retirement and whether you tend to panic during stock market crashes. The closer you are to retirement or if you are tempted to sell during market downturns, then the less risk you will want to take. The TSP offers several funds that are low risk, such as the G fund, as well as some funds that carry higher risks, such as the C fund. You should consider how much risk you are willing to take with your money, as well as what kind of return you want from your investments. 

– What is the safest TSP fund? 

The G fund is generally the safest option as it invests in government securities. Although you won’t lose money investing in this fund, your rate of return will be low.  This may be a good option if you are close to retirement. 

– How much should I have in my TSP fund to retire? 

It depends on your monthly living expenses, how long you expect to live, and how your TSP funds are invested. It also depends on if and how much your monthly government pension will be. It is best to consult a fiduciary financial planner to know how much you need to have in your TSP so you can retire comfortably. 

– How do I maximize my growth? 

We have discussed the top 3 tips in this blog and to wrap it up, these are the top tips to maximize your TSP growth.

  • Contribute as much as possible (you are allowed to contribute more than 5% of your income)
  • Don’t ignore the Roth TSP option 
  • Don’t take out any loans with your TSP
  • Don’t withdraw early 
  • Invest in the fund/s that are best for your situation

Take the time to learn how you can take full advantage of your TSP, starting with applying the 3 tips above.

If done right, it can help you potentially save tens of thousands more towards retirement. To make sure you’re applying best practices and optimizing your TSP savings, you’re welcome to reach out to our credentialed financial advisors to get tailored advice and hands-on strategizing around how you can better grow your savings. If you are interested in a comprehensive financial plan, schedule a free discovery call with one of our financial planners today! 

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.


District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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