TSP Basics: What is the Thrift Savings Plan (TSP)?

TSP is a defined contribution plan like the 401(k) plans offered to many in the private sector. It is part of a three-part retirement package for FERS* employees, including the FERS basic annuity and Social Security. Investing in the TSP is a vital way to build up retirement savings. With a defined contribution plan, only the amount and timing of the contributions are defined. There is no promise regarding the amount available to the employee at retirement. Instead, the contributions made by the employee, the length of time for which the contributions are made, and the return on investment determine the amount available at retirement.

*Employees under the old CSRS system can contribute to the TSP; however, they do not receive the matching contributions that FERS employees are entitled to.

Most federal employees are eligible to participate in the TSP, including FERS, CSRS, and members of the uniformed services. The employee’s agency automatically sets up TSP accounts for newly hired employees. The agency or service deducts a portion of the employee’s basic pay each pay period to begin the contributions. The agency or service will continue deducting the contribution until the employee changes the contribution amount, stops the contributions, or reaches the IRS contribution limits. The employee has flexibility and calls the shots. Employees determine the contribution amount each pay period, the allocation between the various investment options, and the use of both the Traditional and Roth TSP.

FERS employees are eligible for a match on their contributions by their agency. Employees can contribute nothing and still receive a 1% automatic contribution or contribute as little as 5% and receive the full match of another 5% (1% automatic and 4% agency matching). The government will not exceed the 5% matching even if the employee contributes more than 5%. However, employees can put in more than that until they reach the annual limits. (For 2023, the TSP contribution limit is $22,500 for those under age 50 and $30,000 for those 50 and over.)

Agency/Service Matching Contributions

TSP Funds

TSP offers a selection of five individual funds that offer broad market diversification.

• The G Fund (Government Securities Fund) is not likely to be duplicated in the private sector’s 401(k) options. The US Government guarantees the payment of G Fund principal and interest. The US Government will always make the required payments, meaning it will not incur a loss.
• The F Fund (Fixed Income Index Fund) tracks a broad index of the total US bond market.
  The C Fund (Common Stock Index Fund) replicates the Standard and Poor’s 500 (S&P 500) Index and contains stocks of large companies.
• The S Fund (Small Cap Stock Index Fund) invests in a stock index fund that tracks the Dow Jones.
• The I Fund (International Stock Index Fund) invests in international stocks.

Lifecycle or L Funds provide a convenient way to diversify the funds in your TSP account using professionally determined investment mixes. Each L Fund is comprised of all 5 of the individual TSP funds. The amount invested in the various funds is tailored to the time in which a fund’s participants intend to withdraw money. For example, an employee could consider investing in the L 2045 Fund if they plan to retire and withdraw funds in 2045, give or take a couple of years on either side of 2045. L Funds with later time horizons are focused on growth and are invested more aggressively, with higher percentages in foreign and domestic stocks and lower percentages in government securities and bonds. As each L Fund matures, its mix gradually shifts to more conservative investments with a higher percentage of low-risk investments. This more conservative mix is designed to preserve assets while protecting against inflation.

Once an L Fund reaches its time horizon, it is retired, and any money in it becomes part of the L Income Fund, which is designed to produce income for participants. Putting your entire TSP account into one of the L Funds allows you to achieve the best-expected return for the amount of expected risk.

Roth and Traditional TSP

The TSP added the Roth option in 2012. The Roth TSP differs from a Roth IRA as there are no income limits restricting participation, although contribution limits remain.

Annual limits (plus a catch-up amount for those 50 and over) exist regardless if the contributions were to Roth, traditional, or a combination of the two accounts.
Roth TSP contributions are made after-tax withholdings, meaning you pay taxes on your contributions at your current income tax rate. The benefit is that you will not pay taxes on the contributions or qualified earnings in the future. Traditional TSP contributions go into the TSP before tax withholding. As a result, you will pay taxes on the contributions and earnings at the income tax rate of the year you make the withdrawal.

TSP participants can take money out without a penalty starting at age 59½**, retired or not. TSP loans and hardship withdrawals are also available but must be carefully considered before acting.

** No Early TSP Withdrawal Penalty for Public Safety Employees (most Special Category Employees) The Defending Public Safety Employees Retirement Act of 2015 amended the Internal Revenue Code to allow specified federal law enforcement officers, federal firefighters, air traffic controllers, and customs and border protection officers who separate from service during or after the year they become age 50 to make withdrawals from the Thrift Savings Plan (TSP) without incurring a 10 percent early withdrawal penalty. This change is effective for withdrawals from the TSP paid after December 31, 2015. The SECURE 2.0 Act of 2022 was amended by striking “age 50” and inserting “age 50 or 25 years of service under the plan, whichever is earlier”. This brings consistency to the provisions found for Special Category Employees.