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A Thrift Savings Plan is a great financial tool for government employees and members of the military, but it's important to understand how it works to fully reap the benefits.
Enjoying a cozy retirement is probably all of our dreams – right? After decades of continuous work, it’s the least we can ask for.

That’s why a 401k is so awesome. And just like a 401k is for private employees, the Thrift Savings Plan is a retirement plan for government employees.

If you’re a federal employee or from the uniformed services, chances are you’re already using the Thrift Savings Plan (TSP). It could be because the government body you work for automatically enrolled you, or you chose to invest in a TSP yourself.

But what exactly is a TSP?

In this article, I’ll do a deep dive on the Thrift Savings Plan so you have a full understanding of what you’re getting by enrolling in one as a government employee.

What is the Thrift Savings Plan?

In 1986, Congress established the TSP in the Federal Employees Retirement Act. The TSP is made up of the same model the 401k uses. They’re both defined as “contribution plans,” and both are employee-dependant–meaning you have to fund it yourself. Even the contribution limits are the same.

The TSP, like the 401k, is tax-deferred.

This means you make contributions to the account using pre-tax dollars, paying taxes on your savings when you withdraw funds from the TSP at retirement.

There is also a Roth TSP option, where you contribute using your post-tax dollars. This way, you won’t incur taxes or penalties on your investments when you withdraw.

Defined Contribution Plan

TSP is a defined contribution plan. This means you can put a certain amount into your account each year, and the amount has to be under the yearly contribution limit.

The contribution limit is currently $19,000. If you’re 50 years or older, your contribution limit is stretched to $26,000 (allowing for a “catch-up” contribution like most other retirement plans have).

You can invest TSP funds using several predefined investment vehicles (i.e., index funds), and most TSP holders are eligible for contribution-matching.

Should You Choose a Roth or Conventional TSP?

Both TSPs operate primarily the same way. The only difference is the timing of your taxes.

Most people prefer to go with the conventional TSP because they’ll be in a lower tax bracket when they retire. So, the amount you receive at retirement will be taxed a lot less than it will be now.

But with Roth TSP, the advantage is that, since you contribute after-tax dollars, the interest and profits you earn from your investments will also be tax-free. So, you don’t pay any taxes on the withdrawals or profits you’ve made within your Roth TSP (unless they don’t comply with IRS regulations, of course).

Benefits of a TSP

There are two major benefits of a TSP:

1. Contribution Matching

Contribution matching refers to the amount of money your employer will put in your TSP, relative to your contribution. This means that if you’re putting 5% of your yearly income of $100,000 ($5,000) to your TSP, the government agency you work for is putting in $5,000 as well (assuming a 100% match). This is more than most private employers.

If you come under the Federal Employee Retirement System (FERS), your employers are obligated to contribute 1% of your yearly income to your TSP anyway. This 1% comes after three-years of service.

It’s also important to know the total contribution matching can’t exceed 5%. So even if you’re putting more than 5% of your income into your TSP, you won’t be getting more than 5% from your employer’s match.

2. Low Fees

Since it’s a government-subsidized retirement plan, the TSP expenses you’ll incur tend to be much lower than something like a 401k. As of 2018, the average expense ratio was 40 cents per $1,000 invested.

Honestly, this is as low as it gets. None of the private investment funds I hold even come close to this.

One reason for this generous subsidy is the unvested funds left by employees who left the federal service too early. That, among other factors, help TSP holders save a lot of money in the long run in fees, which truly makes a difference in their compounding interest and profits.

TSP Investment Options

A TSP offers certain pre-packaged investment options. At first, this may seem like a restriction, because it doesn’t allow you to invest in the stocks or funds that YOU want. But on the positive side, the funds you can invest in through your TSP tend to be low-cost and relatively stable.

The funds you can invest in within your TSP are divided into six parts:

  • G
  • F
  • C
  • S
  • I
  • L

Let’s break these down a little further.

G Fund

Uncle Sam took a special interest in the TSP and allowed the issuance of special short-term U.S. Treasury Securities. Special in the sense that they are only issued for TSP. The actual name of the G Fund is “Government Securities Investment Funds.”

The upside of these funds is that they’re protected against inflation. Since they work on the principle of interest, if you invest in them, your capital is fairly safe.

The downside of these funds is that you’ll earn relatively low returns, although even their ‘low’ has historically been higher than returns from the treasury bills.

All TSPs opened before September 5, 2015, automatically got their money invested in G Funds if the TSP holders didn’t specifically choose another fund, while the ten-year compound return has been around 2.3%, as of 2018.

F Fund

The F Fund, or Fixed Income Index Investment Fund, is exactly what the name says it is–an index fund. This particular index fund, the F Fund, follows the Bloomberg Barclays U.S. Aggregate Bond Index.

This index is composed primarily of treasury agency bonds, asset-backed securities, and corporate/non-corporate bonds. If it sounds complicated, that’s because it is.

There are pros and cons to choosing an F Fund.

The pros are that in the long term, you stand at a chance to make much more money than with a simple G fund.

The con is the risk. Sometimes, following the bond market, your investment might not be making enough money to keep up with inflation. Or you might incur a loss.

TSP holders, like any other investment portfolio, shouldn’t put all their eggs in one basket. A part of total TSP investments can be allocated to the F fund.

The ten-year compound return of the F Fund is around 3.73% (through 2018). In those ten years, the returns reached as high as 7.89% (in 2011) and fell as low as 0.15% (in 2018).

C Fund

The Common Stock Index Investment Fund (C Fund) is another index, and it tracks the performance of the S&P 500–one of the most comprehensive market indices. The S&P 500 includes 500 of the biggest companies listed on the stock exchange, by market capitalization.

Just like the F Fund, the C Fund has the potential of high returns, with the risk of bottoming out. That said, the last significant dip in the S&P 500 was during the recession of 2008 to 2009.

The C Fund gave the 10-year compound returns of a whopping 13.17% in 2018, with the highest return being 32.45% in 2013.

S Fund

Small Cap Index Investment Fund, or S Fund, follows the performance of Dow Jones U.S. Completion Total Stock Market Index. The small-cap in the name refers to the small market capitalization of the company. It’s comprised of the companies that are not included in the S&P 500, so you can consider it the next best thing.

It carries the same risks that other index funds do. Similarly, the chances of capitalizing on the risks are also greater.

As of December 2018, the S Fund provided the 10% returns amounting to an amazing 13.67%, even better than the C Fund. The fund incurred three loss-cycles in those ten years, unlike the C Fund, which only suffered one loss cycle. Still, the average came out to be better.

As they say, no risk, no reward.

I Fund

Closing the list of the index funds is the outreaching International Stock Index Investment Fund. This fund tracks (actually replicates) the exact numbers of MSCI EAFE. Here, the EAFE pertains to the different international regions, which comprise of developed markets outside the U.S. and Canada.

The risks associated with this fund are a bit different. It’s shaky, even when the local index funds are rock solid because of some global turmoil. On the other hand, it may perform better during local economic crises.

Seeing the 10-year returns, this hasn’t been the case so far. The I Fund accumulated returns of 6.48% through 2018, with the highest being 30% in 2009.

L Fund

Now the L fund is a different breed entirely. Or rather, it’s a mixed breed. The “L” refers to Lifecycle. If you don’t have the time, experience, or simply the energy to take risks with your TSP savings yourself, you can let someone else handle it for you.

L funds are a combination of all the five funds stated above. They’re mixed with volatility, returns, and diversification in mind. These funds are cleverly designed and divided based on the time of your retirement.

The principle is simple; the longer you have until retirement, the more risk you can tolerate. Also, the more time you have, the more power of compounding you can take advantage of. Currently, the L Funds are divided into five categories.

  • L 2050
  • L 2040
  • L 2030
  • L 2020
  • L Income

The ratios in which your TSP savings are invested in G, F, C, S, and I funds, changes depending upon your time of retirement. The further you are from retiring, the riskier and more potentially profitable the blend of investments are. The closer you get, the more conservative and safer it becomes.

It’s important to understand that no matter how much risk they carry, your chances of a comfortable retirement is reliant upon good investments, rather than relying on the safety of G Funds. If you can’t diversify your portfolio yourself, or just don’t have the time, L funds might turn out to be a great option for you.

Free Transfers and Account Rollovers

With the investment options cleared up, it’s important to understand that you can move around any amount inside your TSP, free of cost. But there are two stipulations:

First, via the Intrafund transfer option, you can make two transfers from one fund to another in a month. The amount you transfer won’t exactly be the amount, rather the percentage. If you track the indices yourself, this is a great opportunity to get the best out of your investments.

With contribution allocation, you can fix percentages in which your money will be diverted to as soon as it enters your TSP. Both of these options don’t cost a penny.

And second, the account rollover is your ally. Thanks to the extremely low operation cost, you might get more out of your investments if you rollover your Traditional IRA into your TSP. It will help you maximize the benefits by reducing the cost.

Resource: Track your TSP and other investments with Personal Capital’s free financial dashboard.

Next Steps

Bottom Line

A Thrift Savings Plan is a great financial tool. How much you get out of it depends upon you. If you spend a little time each month on managing your TSP the right way, you might just make enough of a change to retire a little earlier than you expected.

Author Bio

Total Articles: 115
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016.

Article comments

24 comments
Russ says:

I am going to be transferring agencies from a local agency to a federal one. I have money in a non-vested pension plan that I believe I will only get back what I put into it over the last 5 years. Can I roll this money into the TSP? If not, will I pay a 10% irs penalty by cashing out this money after taxes? Again, I don’t believe that I will have any earnings at all from this account.

Eddie says:

Yes, you may roll your no-vested pension into TSP.

Liz says:

Thank you so much for covering this. I am military and have a TSP and it’s wonderful to see it laid out where it’s easy to understand and see the options. I have loved having this option because before I joined, my employer didn’t offer a 401k and it was very irritating. I’m so glad that we have this option.

Great post!!

Chuck White says:

TSP returns late 2015 to present have been terrible.
I will be retiring soon and plan on moving my TSP money over to a Fidelity IRA, where I can control
my money. I’ve done so much better on my own.

Mark Hull says:

Chuck,

While the TSP has taken a beating (along with everyone else) I think the returns will continue to stay in line with the stock market over time and potentially beat the market slightly due to the low fees to investors. One can certainly buy individual stocks and beat the average return, but I know I personally am not skilled enough to pick those winners. In March of this year, the C Fund returned 6.79% and the S&P 500 returned 6.60%. I think it is as safe of an investment vehicle as any other stock/bond portfolio offered by other agencies, but as you clearly illustrate, it’s not for everyone and all of us have different situations/requirements to consider. Thanks for commenting.

Best,

Mark

joe says:

Great information,but we can contribute up to $24,000.for those over 50.

Mark Hull says:

Joe, you’re absolutely right. The limit this year went up to $24,000 for those over 50. Thanks!

Karen Garver says:

If you want to transfer money between funds, what is the recommended percentage to transfer at one time?

tTSP/rTSP says:

So I’m wondering in what situations one would use the traditional TSP vs. the Roth TSP. Is this a situation where you would assess your income tax bracket currently vs. at retirement to decide whether to contribute pre-tax (trad TSP), vs. post-tax (Roth TSP)? Is there any benefit to splitting the % of contributions between TSP and RothTSP? My husband and I currently max our pre-tax retirement accts and get matching and both do backdoor Roth. We are high income earners… any reason to switch the allocations around? Just wondering b/c I hadn’t realized the Roth TSP feature existed previously.

RW-in-DC says:

I think of the Roth/Traditional retirement choice as similar to the bird in hand/bush adage: If you believe that tax laws will change, you may want traditional IRA/401K (for the tax deferred salary NOW). If confident that you can charm the bird (or that your taxable income will be low enough), you’ll probably want the Roth option. YMMV. 😉

Hugo says:

I currently have about 400,000 invested in c 50%,s 40% and I 10%. I am 51 years old and planning to retire in about 9 years, do you think I should change my strategy to 50% f fund and 25 s and 25 c?

Johnny says:

Do you think now is a perfect time to invest significantly i.e. 75% to 100% in the I- Fund?

Kevin says:

I am staying away from equities for the next 6-ish years

sam deitelbaum says:

I have been retired for a few years, I am 57, I have about $889K in my TSP. I want to leave my money in TSP, but what is a semi-conservative allocation at this point, I don’t plan on using any of my TSP till I’m 62. I don’t want to be real risky, but I’d still like to earn on it. But I’m really confused what percentages to put in the C, F, G, and S funds to earn a return. Any input would be great.

Dr Vic says:

Definitely leave your money in the TSP! If you simply consider annual fees you pay about 29 cents per your $1000 vs $15 which is the common 1.5 percent investment fees charged by any other organization. This means each year on your 900k you pay TSP $261 vs $13,500 – essentially saving/making you 13k each year! Now given your intent and timeline and current 9 year running bull market, I would recommend 20 percent in F, 60 percent in C, and 20 percent in S. Further recommend you sustain that to age 70, then pull out of the S. BTW, I congratulate you on your investment discipline – excellent nest egg. Lastly, I recommend you get with a financial advisor to address RMDs and other investment options outside of TSP to further enhance your overall investment portfolio because having only one big nest egg that rides on the stock market is not optimal.

Dan says:

Mark,
Hope you’re still answering here! I have resigned my GS position, and with that, my TSP contributions.
1. Can I can contribute directly to my TSP account? Or only thru my other IRA?
2. Can I contribute at the ‘catch-up rate’? Max $24K per year?
Thanks for your answers. I like this as I just found the site.
Dan Horack

DHayes says:

I moved my 50 % investment in c funds about a year ago to g fund. How can I get back in now my fears are allayed and markets are soaring ?

Justin says:

So you sold your C-stocks when the market was going down and you want to buy back in when the market is high? Let me explain to you how that works: If you own 1,000 C-fund shares at $25/share, and then traded them for G-fund securities, and then try to buy back the C-fund shares with your $25,000 in the G-fund when the C-fund shares are now worth $30/share, you basically exchanged your 1,000 C-fund shares for 833 shares. You will have sold low and bought high. The best time to move your money into higher risk funds like C, S, I is when the stock prices are low, not when they’re high. You buy when there is blood in the streets my friend.

Lagrande Smith says:

Do you believe saving 15 percent is better than allocating between lifecycle funds vs C,S,I…etc ?

Lawrence says:

New to TSP,Is setting Contributions Allocation to G,and Interfund Transfer to S or C the best way to invest?
Thanks for your help.

dan luke says:

The article needs updating. You can contribute $19,000 a year into your 401k as of 2019.

debi says:

I am retired have 205,000 in TSP take 750 a month because I’m 70, (I have it invested 10%S and 25% in L40 40% in L30 and 25% in L20) Please help or add suggestions because this is a mess.

SS says:

40% G, 48% S, 12% C – Try that out and every year you get older add 1 more percent to G.

Rhonda says:

I am 43 and I want to retire with a nice TSP at 63 what percentage should I allocate to the various funds? Currently I have 50% G and the other remaining 50 spread between the various L cycles. I know this is not good but I’m not sure how I should allocate.