TSP Retirement

The Thrift Savings Plan (TSP) is the federal employee’s equivalent of a 401(k) retirement plan, designed to help employees save for retirement on a tax-advantaged basis. Federal employees contribute to their TSP savings on a pre-tax basis, meaning contributions are deducted from their paycheck before federal income tax is applied. These contributions reduce taxable income in the year they are made, which can provide immediate tax benefits. Additionally, many agencies offer matching contributions, further boosting the employee’s retirement savings. Like a 401(k), the TSP allows for various investment options, giving federal employees the opportunity to grow their retirement funds over time. The TSP also offers Roth contributions, which are made after-tax but grow tax-free in retirement, providing additional flexibility in retirement planning.

The TSP in Detail

The Thrift Savings Plan (TSP) serves as a defined contribution plan, one of the three pillars of the modern federal employee retirement system. Alongside FERS*, a defined benefit plan similar to a pension, and Social Security, the TSP plays a critical role in shaping a financially secure retirement for federal employees. How an employee utilizes their TSP throughout their working years and into retirement can significantly impact their overall retirement outcomes. Understanding how to optimize the TSP from the outset of government employment is essential for achieving a comfortable retirement. Key decisions, such as how much to contribute each pay period, how to allocate those contributions across various investment options, and whether to use both Traditional and Roth TSP, are pivotal.

The TSP operates similarly to the widely recognized 401(k) plans found in the private sector. In essence, employees contribute a portion of their income to the plan and receive tax benefits on those contributions. The funds can be invested in various options, allowing employees to tailor their investment strategy within the plan’s limitations. The flexibility of the TSP gives employees the ability to contribute as much or as little as they choose and determine how their contributions are allocated.

For FERS employees, the TSP includes an employer match on pre-tax contributions. However, to receive the full match, a minimum contribution threshold must be met. After contributing 5% of their salary, there is no additional government match, though employees may continue to contribute beyond this point, up to the annual limits. For 2022, the contribution limits were $20,500 for those under age 50 and $27,000 for those aged 50 and over.



*It’s important to note that employees under the old CSRS system can still participate in the TSP, but they do not receive the employer match available to FERS employees.

TSP Funds

Your TSP account is designed to grow through investments in one or more of five distinct TSP funds, which are indexed mutual funds. It’s essential to understand that three of these funds are invested in stocks, each tracking a specific market index.

  • The C Fund tracks the S&P 500, focusing on large U.S. companies with an average market capitalization exceeding $6 billion.
  • The S Fund invests in stocks of smaller U.S. companies, but it also includes larger firms, covering the entire U.S. market.
  • The I Fund focuses on international stocks within the MSCI EAFE index** (EAFE stands for Europe, Australia, and the Far East).

In addition to the stock funds, the F Fund tracks the total U.S. bond market, providing a more stable, fixed-income option that is traditionally considered safer than stocks but offers lower growth potential. The G Fund is unique to the TSP and stands apart from private sector 401(k) options. It is fully guaranteed by the government, ensuring that it never incurs a loss. Its return is based on the average yield of certain U.S. Treasury securities, calculated monthly.

For those looking for a more tailored approach, the Lifecycle (L) funds combine all five TSP funds, with the allocation adjusted based on a designated time horizon. For instance, the L-Income fund, designed for retirees, has over 75% invested in the G and F Funds, with less than a quarter in the three stock funds (C, S, and I). Conversely, the L-2065 fund, geared toward individuals planning to retire after 2060, allocates less than 2% to the G and F Funds, with the majority in the stock funds.

In 2012, the Roth option was added to the TSP. Unlike a Roth IRA, there are no income limits for participating in the Roth TSP (though contribution limits apply). Contributions to Roth TSP are made after taxes, and withdrawals are tax-free after the money has been in the account for at least 5 years. Additionally, Roth TSP accounts are not subject to required minimum distributions (RMDs).

TSP participants can begin withdrawing funds without penalty at age 59½, whether they are retired or not. However, for those younger, TSP loans and hardship withdrawals are available but should be approached with caution to avoid potential setbacks. It’s important to fully understand your options before making decisions, as mistakes can be difficult to recover from later. We’re here to help you make the most of your TSP—follow the links to learn more!

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