How to Invest in the TSP: Thrift Savings Plan Funds

Learn How to Get the Most Out of Your TSP Account

investing_stock market
Learn the basics of the Thrift Savings Plan and how to invest in the TSP funds. Getty Images

Whether you are just now enrolling in the Thrift Savings Plan (TSP) or you are looking for tips on investing in the TSP funds, learning how the plan works and how it benefits participants is a wise place to start.

Furthermore, the world of employer-sponsored retirement plans is shifting more and more away from defined benefit plans, or what most people refer to as pensions, and toward the defined contribution plans, such as the 401(k).

Even the federal government is following the corporate world trend of moving away from traditional pensions to put the responsibility of retirement saving more on the shoulders of employees.

For this reason, it is more important than ever for Federal employees to understand how to make the most out of the TSP and the funds in it.

Thrift Savings Plan Basics

If you're familiar with 401(k) plans, you know the basics of the TSP: It's tax-advantaged retirement savings vehicle offered through an employer, in this case, the Federal government. Therefore federal employees, from FBI agents, to members of congress, to service members of the Army, Navy, Air Force, Marine Corps, and Coast Guard can take advantage of the TSP.

Contributions are based upon a percentage of pay and are made through payroll and can be on a pre-tax or after-tax (Roth) basis. The minimum percentage for TSP contributions is 1 percent and the maximum is 100 percent.

However, there is a maximum TSP contribution dollar amount mandated by Internal Revenue Code. This IRC limit for TSP contributions is $18,000. One exception to this maximum contribution is military service members in combat zones. In this case, the maximum contribution is $54,000.

Traditional vs Roth TSP

Generally, pre-tax contributions are best for people who expect to be in a lower federal income tax bracket in retirement.

This is because deferring (putting off until later) taxes is a good idea because you can avoid paying higher taxes now but pay later when at a lower tax rate.

Roth contributions make sense for people who expect to be in a higher tax bracket in their retirement years. In this case, it's best to include income in taxes now at a lower rate and avoid paying taxes at a higher rate later.

No matter how the contributions are made, either pre-tax or after-tax, the investments within the TSP grow tax-deferred, which means participants in the TSP do not pay income tax on interest, dividends, or gains while the money stays in the account. Pre-tax contributions are taxed when withdrawn and after-tax contributions are not taxed again at withdrawal, if certain conditions are met.

How to Sign Up for the TSP and How to Access Your Account Online

Enrolling in the TSP can be done by paper form or it can be done online at mypay.dfas.mil/mypay. If you are a new employee and don't have a myPay account established yet, you can get information about the TSP and the TSP funds online at tsp.gov. This is also where participants can establish an account to track the performance of their TSP and the TSP funds, as well as make investment changes.

TSP Matching Funds

Like most 401(k) plans, TSP participants can receive matching contributions in addition to their own. An employer match is just as it sounds: when you contribute dollars, the employer does too. The matching formula is a bit complex but it's a generous one. Government employees receive an automatic contribution of 1 percent of pay. From there, matching funds can be received on contributions up to 5 percent of pay. Here's how the TSP match formula works:

  • Automatic 1 percent agency contribution
  • Dollar-for-dollar match on the first 3 percent of employee contributions
  • 50 cents for every dollar on the next 2 percent of employee contributions

To simplify the TSP match formula, a government employee or military service member can maximize the TSP match by contributing at least 5 percent of their pay.

This will ensure the maximum match of 5 percent from the government. Therefore, if you contribute at least 5 percent of your pay, you'll get another 5 percent match. Again, as long as TSP participants do not surpass the IRC maximum of $18,000 per year, they may contribute much more than 5 percent of their pay. For example, if you contribute 10 percent of your pay, the government match of 5 percent will bring your total annual contribution to 15 percent, which is a good goal to reach to ensure healthy retirement savings goals.

Note for military: There is no TSP match for service members through December 31, 2017. However, service members who opt in to the new Blended Retirement System (BRS) in 2018 will receive the above match formula. Service members who do not opt in to the BRS can still contribute the TSP but will not receive a match.

Choosing the Best TSP Funds for You

There are essentially two decisions to make when enrolling in the TSP and similar retirement plans: 1) How much you want to contribute, and 2) How you want to invest your savings.

The TSP offers several funds to choose from:

  • The G Fund: This fund invests in short-term US Treasury securities that are specially issued to the TSP and is the safest investment choice in the plan. There is no risk of losing principal; however the fund offers a means of earning interest that can keep up with inflation. The G Fund is the default investment for the TSP, which means TSP participants will need to go on TSP.gov to change investments. This is important because an allocation of 100 percent to the G Fund is too conservative for most investors.
  • The F Fund: This fund invests in bonds and it seeks to passively track the Barclays Capital U.S. Aggregate Bond Index, which covers the total bond market in the U.S. Although bonds are relatively safe investments, they still have principal risk, which means values can decline, although not often. Investors can expect to slightly outpace inflation in the long run (several years or more on average) in the F Fund.
  • The C Fund: This fund invests in stocks and is an S&P 500 Index fund, which means that it passively tracks the Standard & Poors 500 Index, a broad market index that covers about 500 of the largest U.S. companies by market capitalization. The C Fund is appropriate for long-term investors wanting to earn returns significantly ahead of inflation and willing to see fluctuations in account value.
  • The S Fund: This fund invests in small- and mid-cap stocks by passively tracking the Dow Jones U.S. Completion Total Stock Market Index, which consists of U.S. stocks not in the S&P 500 index. Smaller companies have historically carried more market risk but can produce higher returns compared to the S&P 500 index. This means that the S Fund is appropriate for long-term investors with high relative risk tolerance.
  • The I Fund: This fund invests in non-U.S. stocks and tracks the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index. International investing carries political risk and currency risk in addition to the market risk that comes with stock investing. However, adding international stocks to a portfolio helps with diversification, which can have an effect of decreasing overall risk.
  • The L Funds: These funds are life-cycle funds or what are also called target retirement funds. The TSP offers five different L Funds: L Income, L 2020, L 2030, L 2040 and L 2050. As the name and years suggest, the L Funds are designed to invest appropriately for people investing near the target retirement date. The L Funds are professionally managed and consist of an allocation of the TSP G, F, C and S Funds. As the target date approaches, the fund managers will slowly shift the respective fund assets to a more conservative allocation, which is appropriate as investors near retirement. Sometimes life-cycle funds are called "set it and forget it" funds because an investor can choose one fund and not ever manage their own investments until retirement.

In general, unless investors are using the L Funds, it is wise to construct a portfolio of more than one fund. In fact, for purposes of diversification, some investors may choose to invest some percentage of their TSP assets in the G, F, C, S and I Funds.

For more on portfolio construction, see How to Build a Portfolio of Mutual Funds

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.