How to Invest in the Thrift Savings Plan (TSP)

Get the Most Out of Your TSP Account

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The world of employer-sponsored retirement plans is shifting away from defined benefit plans, what most people refer to as pensions, and moving toward defined contribution plans, such as the 401(k). Even the U.S. government has moved from traditional pensions, shifting responsibility for savings to employees in the Thrift Savings Plan (TSP).

It's key for federal employees to understand how to invest in a TSP.

TSP Investing Basics

The TSP is much like a 401(k) plan: a tax-advantaged retirement savings plan offered through an employer. The U.S. government is the employer in the case of the TSP. Federal workers, such as FBI agents, members of Congress, and service members of the U.S. Army, Navy, Air Force, Marine Corps, and Coast Guard, can take advantage of the TSP.

Contributions are based on a percentage of pay. They're made through payroll on a pre-tax or after-tax (Roth) basis. You were enrolled in the TSP at a contribution rate of 5% of your basic salary if you started or resumed federal service on or after Oct. 1, 2020. You were automatically enrolled at 3% if you started between Aug. 1, 2010 and Sept. 30, 2020.

The Internal Revenue Code mandates a maximum TSP contribution dollar amount. This limit for TSP savings is $19,500 a year in 2021, unchanged from 2020. You can set aside an additional $6,500 in catch-up savings if you're age 50 or older.

The maximum contribution for military service members who are in combat zones is $58,000, up from $57,000 in 2020.

Traditional vs. Roth TSP Investing

Pre-tax contributions are often best for those who expect to be in a lower income tax bracket when they retire. Deferring taxes and putting them off until later can be a good idea because you can avoid paying higher taxes now and pay later at a lower rate.

Pre-tax contributions may be the best fit for mid-career service members as well. They may be in a higher tax bracket now than they will be in retirement when they begin making withdrawals.

Roth or after-tax contributions make sense for people who expect to be in a higher tax bracket in their retirement years. It's best to include income in taxable income now at a lower rate and avoid paying taxes later at a higher rate.

Roth contributions are often best for younger service members because they may be in a lower tax bracket now than they will be later in their careers.

The investments in the TSP grow tax deferred whether savings are made before tax or after tax. You won't pay income tax on your own savings, on any federal agency contributions, or any gains while the money stays in the account. Pre-tax contributions are taxed when withdrawn. After-tax savings aren't taxed again at withdrawal if certain conditions are met.

How to Enroll in the TSP

Enrolling in the TSP is automatic if you joined federal service on or after Oct. 1, 2020. It can also be done online via your agency's electronic payroll system. You can also enroll by paper form.

You can obtain information about the TSP online at tsp.gov if you're a new employee. This is also where you can establish an account to track the performance of your TSP and to make any investment changes.

TSP Matching Funds

Like most 401(k) plans, TSP participants can receive matching contributions from their agency or service in addition to their own savings. An employer match is just as it sounds: when you save dollars, your employer does, too. The matching formula is a bit complex, but it's a nice one. You'll receive an automatic contribution of 1% of your pay. Matching funds can be received on contributions up to 5% of pay from there.

Here's how the TSP match formula works:

  • Automatic 1% agency contribution
  • Dollar-for-dollar match on the first 3% of employee contributions
  • $0.50 for every dollar on the next 2% of employee contributions

A government worker or military service member can maximize the TSP match by contributing at least 5% of their base pay. This will ensure the maximum match of 5% from the government.

Contribute at least 5% of your pay to get another 5% in matching contributions from the government.

Of course, TSP participants can save much more than 5% of their pay as long as they don't exceed the annual contribution limit per year. The government match of 5% would bring your total annual savings to 15% if you contribute 10% of your pay.

Choosing the Best TSP Funds

You must make two decisions when you're enrolling in the TSP: how much to save and how to invest your savings. The TSP offers many funds to choose from.

The G Fund

This fund invests in short-term U.S. Treasury securities that are specially issued to the TSP. It's the safest investment choice in the plan. There is no risk of losing principal. The fund offers a means of earning interest that can keep up with inflation, but not much more in a market of low interest rates. An allocation of 100% to the G Fund may be too conservative for most investors.

The F Fund

The F Fund invests in bonds. It seeks to passively track the Barclays Capital U.S. Aggregate Bond Index, which covers the total U.S. bond market. Bonds are relatively safe investments, but they still come with market risk, credit default risk, and inflation risk. Investors can use the F Fund in combination with stock funds like the C, S, and I funds to reduce overall portfolio volatility.

The C Fund

This fund invests in stocks. It's an S&P 500 Index fund. It passively tracks the Standard & Poor's 500 Index, a broad market index that covers about 500 mid-sized and large U.S. companies by market capitalization. The C Fund can be right for long-term investors who want to earn returns well ahead of inflation and are willing to endure ups and downs in their account value.

The S Fund

The S Fund invests in small- and mid-cap stocks by passively tracking the Dow Jones U.S. Completion Total Stock Market Index. This consists of U.S. stocks that are not in the S&P 500 index. The S Fund carries market risk because of its heavy exposure to domestic equities, but it can be a good fit for long-term investors who can afford to have a higher risk tolerance.

The I Fund

This fund invests in non-U.S. stocks. It tracks the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index. International investing carries currency and inflation risk in addition to the market risk that comes with stock investing. But adding international stocks to a portfolio helps with diversification, which can decrease overall portfolio risk.

The L Funds

These funds are life-cycle funds. They're also known as target retirement funds. The TSP offers 10 different L Funds, including L Income and nine other funds designed for targeted retirement dates. The L Funds are set up to invest for people who are investing near their target retirement date. They're professionally managed. They consist of an allocation of the TSP G, F, C, S, and I Funds.

The fund managers will slowly shift the respective fund assets to a more conservative allocation as the target date draws near. Life-cycle funds are sometimes called "set-it-and-forget-it" funds because you can choose a single fund and not ever manage your own investments until retirement.

It can be wise to construct a portfolio of more than one fund unless you're using the L Funds. Some investors may choose to invest some portion of their TSP assets in the G, F, C, S, and I Funds for diversification.

The default fund for newly-enrolled uniformed services TSP members who joined on or after Jan. 1, 2018 changed from the G Fund to an age-appropriate L Fund. TSP participants can visit TSP.gov to change their investments.

NOTE: The Balance doesn't provide tax or investment services or advice. This information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any one investor. It might not be right for all investors. Investing involves risk, including the loss of principal.