Thrift Savings Plan Guide – Everything You Need to Know About the TSP

The Thrift Savings Plan (TSP) is the government version of a 401(k). It is available to U.S. military members and federal employees.
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Thrift Savings Plan Guide
Table of Contents
  1. Thrift Savings Plan Details
    1. Defined Contribution Plan
    2. Tax Deferred Retirement Plan
    3. Automatic TSP Contributions for New Employees
    4. Benefits of Automatic Thrift Savings Plan Contributions
    5. TSP Contribution Limits
    6. Traditional and Roth TSP Plan Options
  2. Thrift Savings Plan Investment Options
    1. G Fund – Short-term U.S. Treasuries
    2. F Fund – U.S. Corporate Bonds
    3. C Fund – Large U.S. Companies (S&P 500)
    4. S Fund – Small U.S. Companies (Wilshire 4500 Index)
    5. I Fund – International Fund
    6. L Fund – Lifecycle Funds (Target Date Funds)
  3. Managing Your Thrift Savings Plan
  4. Why You Should Participate in the Thrift Savings Plan

The TSP is a retirement savings program for civilians and members of the armed forces who are employed by the United States Federal Government. The TSP is very similar to a 401(k) plan in many ways. They are similar because they are both employee-sponsored and they are both defined contribution plans and tax-deferred retirement plans. They also share the same annual contribution limits.

Thrift Savings Plan Details

The Thrift Savings Plan has many similarities to other defined benefit plans, such as a 401k. However, there are a few notable differences.

Defined Contribution Plan

The TSP is a defined contribution plan, which means each TSP participant has their own individual account. The amount in their account is what has been invested by that individual, along with any matching contributions made by their employer. Increases or decreases in the value of the holdings, along with expenses and fees also determine the value of the account. Many civilians employed by the government are eligible to receive matching funds up to 5% of their total pay. Most military members are not eligible to receive matching funds of any kind.

Tax Deferred Retirement Plan

Tax-deferred retirement plans invest money from your paycheck before any taxes have been taken out. This money is then allowed to grow in an investment plan without the drag of taxes affecting the value of the funds. Taxes are assessed on the funds when they are withdrawn as qualified distributions during retirement.

Automatic TSP Contributions for New Employees

Federal employees who are part of the Federal Employees’ Retirement System (FERS) and were hired after July 31, 2010 will be automatically enrolled in the TSP with an automatic contribution of 3% of their basic pay, which will be automatically deducted from the employee’s pay each period and deposited into the Thrift Savings Plan. This is in addition to the Agency Automatic Contributions of 1% of total base pay and will make employees eligible for Agency Matching Contributions.

Employees have the option of opting out of automatic plan participation by simply opting out when they are hired. In addition, TSP members can start, stop, or change contributions at any time by using their agency’s or service’s electronic system, or by filling out form TSP-1 (civilian TSP) or TSP-U-1 (uniformed services).

Civilian employees under FERS also have the opportunity to earn make additional Thrift Savings Plan contributions from their base pay to receive Agency Matching Contributions. Civilian TSP members who contribute at least at least 5% of their basic pay to their TSP account can receive the full amount of agency matching contributions.

Benefits of Automatic Thrift Savings Plan Contributions

Many employers in both the public and private sector have discovered many people believe that retirement plans are a great idea, but the employees often don’t take the time to sign up for the benefits. Companies that offer automatic enrollment have seen a surge in plan participation, as most people opt to leave the contributions in place. In most cases, this is a great idea because automatic contributions make it easy to start saving money.

If you have the opportunity to start investing in the TSP or a similar plan such as the 401k, then go for it. You would be surprised at how easily you can adapt to the slightly lower paychecks. Since the contributions are made before taxes, your paycheck actually decreases by a lower amount than you are contributing.

For example, if you are contributing $100 per month, you might only see a difference of $65 in your paycheck because federal and state taxes haven’t been withheld from your contributions. Your TSP contributions will then grow without the drag of taxes holding them back until you make withdrawals in retirement age. Overall, this is a simple way to save money for retirement.

TSP Contribution Limits

Note – TSP Contribution Limits: The Thrift Savings Plan follows the same contribution guidelines as the 401(k). The contribution limit in 2021 is $19,500, and those who are age 50 or above can make “catch-up” contributions, up to an additional $6,500 per year.

The total amount a member can contribute in any given year is up to $58,000 under the Max Annual Addition Limit (this allows for agency matching contributions and contributions above the $19,500 limit that are made in tax-exempt zones).

Here is a full explanation of the Thrift Savings Plan contribution limits, including the agency match for civilian employees, the military matching contributions which will be included in the Blended Retirement System, the impact of making contributions while deployed to a tax-exempt zone, and more.

The following chart shows the TSP agency matching contributions. Note that you can receive up to a 5% match if you also put in the same amount.

TSP Agency Contribution Chart

Traditional and Roth TSP Plan Options

The TSP now offers participants the opportunity to contribute to a Traditional TSP or a Roth TSP. The difference is how the funds are taxed. Traditional contributions are tax deductible, and give the participant a break today. The funds grow tax-deferred until they are withdrawn at retirement age, at which time they are taxed.

A Roth plan works the opposite way. Contributions are made after the money has been taxed, contributions grow tax free, and are withdrawn tax free at retirement age. There are benefits to both plans, so be sure to research which is best for your situation.

After signing up for the Thrift Savings Plan, investments are automatically withdrawn from the employee’s monthly pay check and invested in the fund of their choice. The default fund if the G Fund. More explanations about the individual funds are below.

Thrift Savings Plan Investment Options

The Thrift Savings Plan has 5 main fund options one can invest in. They are all based on index funds. Index funds are an easy and low-cost way to buy stocks that track a market sector. There is also a 6th fund, the “L Fund,” or Lifecycle Fund, which is a fund comprised of the 5 main funds and allocated for a target retirement date.

Here is a listing of the funds available through the TSP (definitions taken from the fund prospectus, for more information, go to the TSP home page and click on Fund Sheets.):

G Fund – Short-term U.S. Treasuries

The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government. Thus, there is no credit risk. The G Fund offers the opportunity to earn rates of interest similar to those of long-term Government securities but without any risk of loss of principal and very little volatility of earnings.

F Fund – U.S. Corporate Bonds

The objective of the F Fund is to match the performance of the Lehman Brothers U.S. Aggregate (LBA) Index, a broad index representing the U.S. bond market. The F Fund offers the opportunity to earn rates of return that exceed those of money market funds over the long term (particularly during periods of declining interest rates), with relatively low risk.

C Fund – Large U.S. Companies (S&P 500)

The objective of the C Fund is to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies. The C Fund offers the opportunity to earn a potentially high investment return over the long term from a broadly diversified portfolio of stocks of large and medium-sized U.S. companies.

S Fund – Small U.S. Companies (Wilshire 4500 Index)

The objective of the S Fund is to match the performance of the Dow Jones Wilshire 4500 Completion (DJW 4500) Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index. The S Fund offers the opportunity to earn a potentially high investment return over the long term by investing in the stocks of small and medium-sized U.S. companies.

I Fund – International Fund

The objective of the I Fund is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. The I Fund offers the opportunity to earn a potentially high investment return over the long term by investing in the stocks of companies in developed countries outside the United States.

L Fund – Lifecycle Funds (Target Date Funds)

The Lifecycle Funds diversify participant accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes (allocations) that are tailored to different time horizons. The L Funds are rebalanced to their target allocations each business day. The investment mix of each fund adjusts quarterly to more conservative investments as the fund’s time horizon shortens. There are 5 different Lifecycle Funds targeting retirement dates through 2050.

While there are not many options to choose from, these options cover most types of major indexes and have very low fees. In 2016, the administrative expenses for all of these funds was .038% per year ($0.38 per $1,000). That is very low!

Fewer fund choices also make it easier for investors to begin investing. Studies have shown that too many investment choices in a 401k plan can lead to inaction and cause may investors not to participate.

Managing Your Thrift Savings Plan

Managing your TSP is easy if it is your only investment account. Otherwise, you will need to consider your entire portfolio before making changes to your TSP. Be sure to consider your TSP, other employer-sponsored retirement accounts such as a 401k, Roth and Traditional IRAs, and taxable investment accounts.

As you can see, managing your TSP is easy when you are starting out, but it can quickly become complicated.

I use a free online software program called Personal Capital to help manage my investments. Personal Capital makes it easy to link your investment accounts and see an overview of all your investments in one location. Their free tool also analyzes your asset allocation, which you can then use to rebalance your portfolio. It is a very powerful tool!

Learn more about managing your Thrift Savings Plan, including screenshots and advanced tips. Learn more about Personal Capital or sign up for a FREE account.

Why You Should Participate in the Thrift Savings Plan

The TSP is a great way to invest for retirement. It offers a sufficient number of investment options for a well-diversified portfolio, and civil service members receive a generous match of up to 5% of their pay. Service members under the High-3 or previous retirement plans are not eligible for matching contributions. However, the Thrift Savings Plan is a key component of the Blended Retirement System. TSP participants under the BRS will receive the same matching limits as their civilian counterparts, or up to 5%.

The Thrift Savings Plan also offers extremely low management fees, even lower than industry leaders, such as Vanguard, Fidelity, and Charles Schwab.

But the best reason to participate in the TSP is you. You are in control of your financial future, and the TSP is one tool you can use to make that future better. I encourage everyone who is eligible to participate in the TSP to do so, even if they are planning to remain in the military until retirement. Military retirement pay is awesome, but it never hurts to have a little extra money when you reach retirement age.

Thrift Savings Plan Podcast Episode: I love the TSP so much, I had a guest on our podcast to discuss the benefits of investing with the TSP. It’s a great overview of how the TSP works, and why eligible members should participate. This was the first podcast I recorded, and I did have some technical issues, so go easy on the quality! Listen to the TSP Podcast Episode.

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About Ryan Guina

Ryan Guina is the founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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