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

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
• Judges
  
  

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 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 federal retirement savings plan in 2023? 

You will need to set up an elective deferral of around $865.38 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.

National parks are what I consider a ‘hidden gem’. During the Covid-19 pandemic, many people discovered the awesomeness of going to national parks for the first time. In fact, the data shows that pretty much across the nation, there’s been a significant uptick in people going to national parks. 

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 $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 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.