Do you work for the government or the military and want to maximize your thrift savings plan? In this comprehensive guide, we will cover everything you need to know about a TSP, the top three TSP best practices that you can use to get the most out of your TSP, and more.
What is a TSP?
The Thrift Savings Plan (TSP) is a retirement savings program created by the U.S. It is administered by the Federal Retirement Thrift Investment Board (FRTIB). 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.
Who qualifies for a federal government TSP?
A TSP is only open to federal employees and uniformed service members. Some of these groups include:
- Members of the uniformed services
- Federal civilian employees
- Civilian employees of the uniformed services
- Members of foreign service
- Members of Congress
- Congressional employees
What are some benefits of the TSP?
- Diversification: The TSP offers a range of investment options. These can include bonds, stock funds, and a government securities fund. These can help you diversify your portfolio.
- Low fees: TSP investment funds have some of the lowest fees in the retirement savings industry.
- Tax advantages: TSP contributions can be made pre-tax. This means that you can lower your taxable income and reduce your tax bill. The earnings also grow tax-deferred which means that you don’t have to pay taxes on them until you make a withdrawal. TSP contributions can also be made after tax, which means it will grow tax-free.
- Employer contributions: Some military branches and federal agencies offer employer-matching contributions. This can help you reach your retirement savings goals faster.
- Automatic enrollment: Many federal employees are automatically enrolled in the TSP. This makes it easy to get started and to stay consistent.
- Portability: If you leave federal service then you can transfer your TSP to another eligible retirement plan such as a 401(k) or an IRA.
What are the disadvantages of investing in a TSP?
Limited investment options: There are limited investment options. There are only 6 types of TSP funds. However, they have recently addressed this by offering a mutual fund window, which gives federal employees access to a wider range of investment options.
Early withdrawal penalty: If you withdraw money from your TSP before you are 59 1/2 years old (unless you meet the other TSP withdrawal rules), then you typically have to pay taxes and a 10% penalty (some exceptions apply).
Defined contribution plan: 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 consider how much you will need for retirement to ensure you are saving enough.
Unable to contribute after government service ends: Once you retire or leave the government sector, then you can no longer contribute to your TSP. However, you do have the option to leave your funds within the TSP, roll them into a different 401(k) plan, or roll them into a traditional IRA.
What are the new TSP withdrawal rules?
The TSP rules changed under the Secure Act 2.0. From January 1, 2023, retirees who fall under special provision employees (Law Enforcement, Firefighters, Air Traffic Controllers) can access their TSP either the year they turn 50 or older, or if they are separating with at least 25 years of service at any age. You must be at least 59 ½ to access funds while still working.
What are the contribution limits for TSP in 2024?
The TSP contribution limit for Federal workers and military personnel in 2024 is $23,000. This is an increase of $500 from 2023. 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 $30,500 in total. Active military members who are deployed in combat zones and receive tax-free income can contribute up to $69,000 in 2024. This has increased by $3,000 from 2023.
How do I maximize my federal retirement savings plan in 2024?
You will need to set up an elective deferral of around $958.33 per pay period if you want to make the maximum contribution of $23,000. 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. 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 pay about 24% to 25% in federal income taxes, plus applicable state taxes, on that money when they take it out during retirement.
Thus, by contributing to a Roth TSP, you’re paying taxes on the contributions now 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 $23,000 a year to your TSP, which is the annual limit for TSP contributions in 2024.
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 $23,000, 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 cautious 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 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, we take a cautious approach to the S fund.
Is TSP a 401(k)?
A Thrift Savings Plan is similar to a 401(k) but the federal government does not directly regulate it. 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.
Differences between TSP and 401(k)
|Available to federal employees
|Available to employees of private companies
|Limited range of investment options (unless you avail of new mutual fund window)
|A wider range of investment options
|Generally have lower fees
|Mix of low and high fees
Similarities between TSP and 401(k)
- Traditional and Roth options: A TSP and a 401(k) plan both offer traditional and Roth options.
- Contribution limits: A TSP and a 401(k) both have the same contribution limits. The standard contribution limit for a TSP and a 401(k) is $23,000 for 2024.
- Matching contributions: Many employers offer matching contributions for a TSP or a 401(k).
- Rollover: Both TSP and 401(k) plans allow individuals to roll over their account balances to another retirement plan.
- Early withdrawal penalties: Both TSP and 401(k) plans impose a penalty for withdrawals made before age 59 ½. There are some exceptions to this.
Is a Thrift Savings Plan 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 the price at tax time.
Differences between TSP and IRA
|A retirement plan for federal employees.
|IRAs are individual retirement plans available to anyone with an earned income.
|$23,000 for 2024.
If you are 50 and older then you can make an additional catch-up contribution of $7,500. Active military members who are deployed in combat zones and receive tax-free income can contribute up to $69,000 in 2024.
|$7,000 for those under 50, and $8,000 for those age 50 or older.
|Some employers offer employer-matching contributions for TSP.
|No employer contributions.
|Wide variety of investment options.
|Generally have lower fees.
|A mix of high and low fees.
Similarities between TSP and IRA
- Early withdrawal penalty: There are early withdrawal penalties for both a TSP and an IRA if you withdraw funds before age 59 ½. There are some exceptions to this.
- Rollover: You can roll over from a TSP and an IRA to another eligible retirement plan.
- Contribution deadline: For an IRA, you have up until April 15 of the following year to make contributions for the previous year. The deadline for TSP contributions for the year is the end of the calendar year.
What is the 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 previously unavailable to TSP participants. TSP participants must meet specific 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.
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 they 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 TSP fund should I invest in?
The TSP has 6 different investment options.
- The Government Securities Investment (G) Fund: invests in government bonds.
- The Fixed Income Index Investment (F) Fund: invests in government and high-quality corporate bonds.
- The Common Stock Index Investment (C) Fund: holds large-company U.S. stocks.
- The Small Capitalization Stock Index (S) Fund: invests in small to mid-sized company U.S. stocks.
- International Stock Index Investment (I) Fund: invests internationally (Europe/Japan)
- 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 will take with your money. This will depend 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.
At what age is TSP mandatory withdrawal?
Mandatory withdrawals, also known as required minimum distribution (RMDs), must begin at age 73 for TSP accounts. The RMD age will increase to 75 in 2033. Failure to take RMDs will result in a 50% penalty on the amount you were supposed to withdraw.
Can I take a lump sum from TSP?
You can take a lump sum distribution from your TSP. However, there may be tax consequences and penalties. In general, lump sum distributions are discouraged, especially for those under 59 ½. Leaving funds in a TSP will enable you to reap the benefits of compound interest.
Where can I find the federal TSP login website?
1. Go to www.tsp.gov
2. Press the ‘Login’ button on the top right of the website. You can then put in your username and password. If you have not used the TSP website before, you can set up a new login for ‘My Account’.
What happens to your TSP account if you leave federal service?
You will no longer be able to make employee contributions once you leave federal service. You have several options for what to do with your TSP when you leave:
- Leave it: As long as you have a balance of at least $200, you can leave the funds in your TSP.
- Roll it over to an IRA: You can roll your TSP over to a traditional IRA or a Roth IRA. Note that if you roll it to a Roth IRA, you may be subject to taxes.
- Roll it over to a new employer’s retirement plan: If your new employer lets you roll over your retirement plan, you can roll your TSP account into that plan.
- Cash out: You could withdraw your TSP as a lump sum. However, you will be subject to income taxes and an early withdrawal penalty.
It’s important to talk to your financial advisor before deciding which approach will be best for you when you leave federal service.
How do I maximize my federal retirement savings plan 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
Is the TSP a good option for saving for retirement?
The TSP can be a good option for federal employees and members of the uniformed services who want to save for retirement. If your employer offers contribution matching, a TSP is even more attractive.
Take the time to learn how you can take full advantage of your TSP
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!
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.