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.
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 October 1, 2020. You were automatically enrolled at 3% if you started between August 1, 2010, and September 30, 2020.
The Internal Revenue Code mandates a maximum TSP contribution dollar amount. The limit for TSP savings was $19,500 a year in 2021; it increased to $20,500 in 2022. 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 was $58,000 in 2021, increasing to $61,000 in 2022.
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.
Note
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 October 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. That is where you can also 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, so does your employer. 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 of 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. That will ensure the maximum match of 5% from the government.
Note
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 were to 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, and 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 professionally managed L Funds, including L Income and nine other funds designed for targeted retirement dates. The L Funds are set up for people who are investing near their target retirement date. 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 never 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.
Note
The default fund for newly enrolled uniformed services TSP members who joined on or after January 1, 2018, changed from the G Fund to an age-appropriate L Fund.
Frequently Asked Questions (FAQs)
How much should I contribute to my TSP?
One common suggestion for how much to save for retirement is at least 15% of your income. Others believe that the minimum should be whatever maximizes your employer contribution; in the case of TSP funds, that would be 5% of your income. However, this is a highly personal question, and it's best to take it to a financial advisor who can consider your unique circ*mstances.
How do you change your TSP fund allocation?
TSP participants can visit the Thrift Savings Plan website to change their investments. There are two ways to change the way your TSP funds are invested. The first is a contribution-allocation adjustment that changes the way new money is invested. The other option is an interfund transfer (IFT) that shifts your existing TSP funds from one investment into another. You're only allowed two IFTs per calendar month, and any IFT requests after that can only shift money to the G Fund.
FAQs
Eligible rollover distributions of your traditional balance may be rolled over to a traditional IRA, an eligible employer plan, or a Roth IRA. taxed in the current year, and no income tax will be withheld. You won't be taxed on this money until you withdraw it from the traditional IRA or the eligible employer plan.
How can I make the most money with my TSP? ›
– How do I maximize my growth?
- Don't take out any loans with your TSP.
- Don't withdraw early.
- Invest in the fund/s that are best for your situation.
Eligible rollover distributions of your traditional balance may be rolled over to a traditional IRA, an eligible employer plan, or a Roth IRA. taxed in the current year, and no income tax will be withheld. You won't be taxed on this money until you withdraw it from the traditional IRA or the eligible employer plan.
How can I double my TSP money? ›
The rule of 72 is a great way to estimate how long it will take for your TSP to double. This rule says that if you divide 72 by your average investment return then you'll get how many years it takes to double. For example, if on average you earn 10%/year then your money will take 7.2 years to double (72/10= 7.2).
How to double your TSP in 2023? ›
To contribute the 2023 maximum annual amount for both regular TSP and TSP Catch-up for a combined total of $30,000, you should enter one election amount of $1,154 into myPay during December 4 – 10, 2022, and your election should be effective on December 18, 2022, the first pay period for 2023.
How much should I have in my TSP at 40? ›
Experts generally suggest that you'll need about 80% of your salary after retirement to avoid sacrificing your lifestyle. This isn't a perfect rule — after all, if you're used to living a frugal, savings-oriented lifestyle, you could probably retire comfortably on less. However, it is a good starting point.
What is the average TSP balance at retirement? ›
For most recent figures by month, see this article. Average TSP account balances drifted into the high $100,000s at the end of 2021. Average Roth TSP account balances were in the low-five figure range for FERS participants, and they reached about $23,000 among the far fewer CSRS participants, at the end of 2021.
Can I take all my money out of TSP? ›
You can request to receive a total distribution of your entire TSP account balance if you want to take all of your money out of the TSP. Once processed, your TSP account balance will be $0, and you'll no longer be able to move money into the TSP from eligible plans.
Is it bad to withdraw from TSP? ›
The taxable portion of your withdrawal is subject to federal income tax at your ordinary rate. Also, you may have to pay state income tax. An additional IRS early withdrawal penalty of 10% may apply if you're under the age of 59½.
Can I use my TSP to pay off my mortgage? ›
By using a TSP to pay off a mortgage, you will lose the mortgage-interest deduction that reduces your AGI, or adjusted gross income. Further, because tax-deferred assets are being used to pay off the mortgage, the tax consequences are compounded¹.
Dave Ramsey's advice is to save 5% into the TSP to get the full match, then max out a Roth IRA, and then put more into the TSP if you are able to save more after that.
What is the TSP strategy for 2023? ›
The Internal Revenue Service has announced the Thrift Savings Plan (TSP) elective deferral limit for 2023 will increase to $22,500 per year. These limits apply to the combined total of tax-deferred traditional and Roth contributions.
What TSP fund has the highest return? ›
Every Thrift Savings Plan fund scored positive returns in January, starting out 2023 on a good note for federal investors. The biggest winner was the small cap stock index S Fund, with a return of 10.82%.
Can TSP make you a millionaire? ›
Federal employees who are members of the Thrift Savings Plan (TSP) have the potential of becoming a TSP millionaire, with a fat nest egg in addition to their CSRS or FERS annuity. As of November 2022, there are 65,000 TSP millionaires.
What months are best for TSP? ›
July is Best Month for TSP Performance Since Trump Administration: One Fund Up 10.32% TSP performance in July was a bright spot in a dismal year for TSP fund returns.
What is the 5 year rule for TSP? ›
Earnings are considered qualified after both of these Internal Revenue Code (IRC) requirements are met: 5 years have passed since January 1 of the calendar year when you made your first Roth TSP contribution and you are at least age 59½, permanently disabled, or deceased.
Is 5% in TSP good? ›
Contributing to the TSP
The U.S. government will provide a 5% contribution of your basic pay to the TSP, so 5 percent is the absolute minimum you should be contributing. If you contribute less than that, you're missing out on free money.
Can I retire at 62 with $400,000 in 401k? ›
Yes, you can retire at 62 with four hundred thousand dollars. At age 62, an annuity will provide a guaranteed level income of $25,400 annually starting immediately for the rest of the insured's lifetime. The income will stay the same and never decrease.
Is it better to leave money in TSP after retirement? ›
Depending on when you begin retirement, you can simply leave the money in the TSP let it continue to grow. If you do not need to access it yet, it might be wise to let it be. Similar to other retirement accounts, you will need to begin minimum withdrawals at age 72. This is called a Required Minimum Distribution (RMD).
How many TSP millionaires are there? ›
The latest figures show that there are now 76,889 millionaires as of the end of 2022.
The Simple Recipe to become a TSP Millionaire
- Contributions: Put in as much as you can afford.
- Investing: Invest your account aggressively.
- Time: Let your account grow for 30 years.
- Ignore every financial crisis.
- Ignore everyone who is not a TSP millionaire.
It generally takes between 7 to 10 business days to process your request once you've properly completed and submitted it. We disburse withdrawals each business day. You can check My Account at tsp.gov or call the ThriftLine to find out the status of your withdrawal request, including whether the payment has been made.
How many times can you withdraw from TSP? ›
There are many changes, but here are some highlights. Under the new TSP withdrawal options, all participants can take one withdrawal every 30 days. Participants who have left federal service will have no other limitations beyond the 30-day requirement to make partial withdrawals from the TSP.
Can I withdraw my TSP in a lump sum? ›
When you are ready to withdraw your money from your TSP account, you can do it all at once (commonly referred to as a lump-sum payment) or over a period of time. Or you can purchase an annuity that will make payments to you for life.
Can I borrow from my TSP to pay off debt? ›
With few exceptions, we rarely advise taking monies out of the TSP to pay down debt. The cost of doing so is generally greater than the benefit.
What percentage of TSP are millionaires? ›
TSP millionaires now comprise about 1.7% of all accounts, compared with about 3% last year.
What is the most aggressive TSP account? ›
The C, S, and I funds are the more aggressive of the funds in the TSP. The reason they are called “aggressive” is because they have a much higher chance of sustaining major growth over time. But because of this, they can also be much more volatile than the G and F funds.
What are the most aggressive TSP funds? ›
The conservative funds are the G and F funds and the aggressive funds are the C, S, and I funds.
What is the recommended TSP allocation by age? ›
In The Elements of Investing: Easy Lessons for Every Investor , Burton Malkiel recommends these age-based asset allocations:
- 20-30s – bonds 10-25%, stocks 75-90%
- 40-50s – bonds 25-35%, stocks 65-75%
- 60s – bonds 35-55%, stocks 45-65%
- 70s – bonds 50-65%, stocks 35-50%
- 80s+ – bonds 60-80%, stocks 20-40%
Given the current economic and market cycle, if you're nearing retirement and your cash reserves are not close to at least 6-12 months of your expenses, you may want to consider slowing down your TSP contributions so that you are able to take more of your paycheck home and use that additional capital to build up your ...
Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss.
What is the least risky TSP fund? ›
The fifth core fund, the G Fund, invests in very low-risk, low-yield government bonds and guarantees principal protection to investors. The G Fund is intended for very conservative investors.
What is the lowest risk TSP fund? ›
The G Fund: This fund is considered the investment choice with the lowest risk among the TSP fund options. While investment returns are historically very low, this fund invests in short-term US Treasury securities and there is very little risk of losing money in this fund.
What is the average TSP? ›
Average TSP account balances for FERS participants reached $156,702.00, while average balances for CSRS participants reached $174,679.00 as of October 2022. Average TSP account balances for FERS participants reached $21,302.00, while average balances for CSRS participants reached $29,075.00 as of October 2022.
What is the TSP age 55 rule? ›
TSP Withdrawal Ages
Regular FERS employees separating from service the year they are turning 55 or older can access their TSP and do so without incurring a 10% penalty.
How many TSP members are millionaires? ›
The latest figures show that there are now 76,889 millionaires as of the end of 2022. That is an increase of about 17.4% since the end of September. There has been a drop of about 31.9% in the number of millionaires since December 2021.
What do most people do with their TSP when they retire? ›
Your TSP account is a portable retirement benefit. This means that when you withdraw your account, you can have the TSP transfer part or all of your single pay- ment or certain monthly payments to a traditional IRA or an eligible employer plan (for example, the 401(k) plan of a new employer).
How to become a millionaire off TSP? ›
The Simple Recipe to become a TSP Millionaire
- Contributions: Put in as much as you can afford.
- Investing: Invest your account aggressively.
- Time: Let your account grow for 30 years.
- Ignore every financial crisis.
- Ignore everyone who is not a TSP millionaire.
They have participated in the TSP for an average of 28.2 years. The largest single end-of-year balance in the largest defined contribution plan in the world totals a staggering $10.9 million, up from $8.8 million a year ago.
Can TSP make you rich? ›
When Steve hit the $1 million mark in October 2021, there were 98,523 TSP millionaires overall, but that includes all the federal workers in the TSP program, as well as military members. Those millionaires averaged 28 years of contributions. Steve hit the mark in his 20th full year in the plan.
Consider leaving your funds in the TSP unless you don't want to deal with extra paper work or you want more investment options. Otherwise, consider rolling your TSP account assets into your new 401(k) plan if you have one, or one of the other following options.
What is the most profitable TSP fund? ›
Best Performance Among Lifecycle Funds
The Lifecycle (L Funds) with the highest returns were the most aggressive funds as their percentage of stocks in the account is the highest. This means the L 2065, L 2060, and L 2055 provided investors with the best annual returns (19.90%).
