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Federal Thrift Savings Plan (TSP) – Complete Guide & Advice

By Pat S

us flag moneyPossibly one of the greatest benefits to U.S. government or military service is the Thrift Savings Plan. The Thrift Savings Plan (also known as the TSP) is a retirement savings and investment plan offered to current employees of the military and federal government.

Since it’s a “defined contribution” retirement plan, the retirement income you receive from the TSP will depend on how much you (and your agency, if applicable) contribute during your working years, along with how well your investments perform over that time.

Though it offers numerous advantages for retirement savings, the TSP is under-appreciated and may be the most under-utilized benefit offered by the federal government.

History of the TSP

The Thrift Savings Plan was established by Congress in the Federal Employees’ Retirement System Act of 1986 for federal employees and members of the uniformed services (including the Ready Reserve). It is administered by the Federal Retirement Thrift Investment Board, which is an independent government agency managed by five board members and an executive director appointed by the president.

The TSP is very similar to a civilian style 401k or 403b retirement plan and offers similar savings options and tax benefits. These benefits include matching funds contributed on your behalf by your employer (for eligible employees), and tax advantages, including an income deduction and long-term tax deferral on contributions and their growth.

Because you fund your TSP with “pre-tax” dollars, you actually lower the amount of income you must pay taxes on. This in turn decreases your tax burden while you’re employed, which can be particularly significant if you contribute the maximum amount or are in a high income tax bracket.

Moreover, while your funds are invested, you are not taxed on their earnings until you make withdrawals. This allows you to participate in compound growth, in which your earnings create earnings, and is most beneficial the longer you have until retirement.

A new option is also becoming available, the Roth Thrift Savings Plan, where contributions are taxed, but withdrawals are tax-free.

TSP Eligibility

If you are a federal employee or a member of the armed forces, and aren’t sure whether you are eligible for participation in the TSP, you probably are. In fact, you are eligible to contribute to the TSP if you fit into one of the following categories:

  • A Federal Employees’ Retirement System Employee
  • A Civil Service Retirement System Employee
  • A member of the uniformed services (active duty or Ready Reserve)
  • A civilian in certain other categories of government service

To make qualified contributions to a TSP up to the maximum allowed amount, you must also be:

  • Actively employed by the Federal Government, or
  • In pay status (continuing to receive a paycheck), or
  • Working at least part-time

If you’re not sure which of these categories you fall into, contact your personnel or benefits office to determine your eligibility.

savings hands

Contribution Limits and Rules

The maximum allowable contribution to the Thrift Savings Plan is $16,500 if you are under the age of 50, or $22,000 if you are over the age of 50. The scaled contribution limits allow for a “catch up” contribution of $5,500 to enable employees rapidly nearing retirement age to stash more cash during the remainder of their working years.

Eligible employees are able to make regular employee contributions to the TSP at any time. Typically, contributions are made from pre-tax payroll deductions and will continue until you either:

  • Make a new election changing the amount
  • Elect to stop your contributions
  • Reach the IRS contribution limit
  • Take a financial hardship withdrawal

TSP Withdrawals and Taxes

Eventually, you will have to pay taxes on your contributions and their growth, but you will not be taxed until you begin withdrawing funds during retirement, which is typically defined as over the age of 59 1/2.

If you withdraw funds prior to this age, you will be required to pay an additional 10% penalty tax plus regular income tax on the entire amount withdrawn, with one exception. With the TSP, you are given the option of early retirement. Specifically, if you retire or otherwise separate from service at or after age 55, but before age 59 1/2, you can withdraw funds from your TSP without paying the 10% early withdrawal penalty tax.

You will still, however, be subject to regular income tax as you would on any withdrawals. You can also make an in-service withdrawal without the 10% penalty if you are still working and over 59 1/2 years old. That said, you are limited to only one age-based in-service withdrawal.

TSP Loans

Alternatively, you can take out a loan from your TSP while you’re still working if you meet eligibility requirements. When you take out a loan, you must repay the entire amount with interest to your TSP account within 1 to 15 years, depending on the type of loan you take out.

Two loan types are available: a general purpose loan and a residential loan. The former has a repayment period of one to five years and may be used for any purpose. The residential loan, on the other hand, has a repayment period up to 15 years, and can only be used to purchase or construct a primary residence, and requires documentation to prove the intended use.

Keep in mind that when you take out a loan, you give up any earnings the loaned amount would have otherwise accrued and you may be double-taxed if you pay the interest on your loan amount from after-tax funds. This is because these funds will be taxed again when you withdraw them during retirement.

Rules for Civilian TSP Participants

Agency Automatic Contributions

If you happen to be a FERS employee, your agency or service will contribute an amount equal to 1% of your basic pay to your TSP account during each pay date. This 1% contribution is known as an Agency Automatic Contribution. There is no waiting period for agency automatic contributions, nor does an employee need to elect to participate in the plan.

FERS members, regardless of their contribution election, all receive Agency Automatic Contributions. In the absence of your selection, these contributions are invested in a conservative Government Securities Investment (G) Fund until you change your election.

Agency Matching Contributions

In addition to Agency Automatic Contributions, FERS employees are eligible to receive Agency Matching Contributions based on the amount of their elective tax deferral. There is no waiting period for matching contributions, but you must be a currently enrolled member in elective deferral to receive matching funds.

FERS participants who elect to participate receive matching contributions on the first 5% of pay that they contribute during each pay period. Of this 5%, the first 3% of pay is matched dollar for dollar, while the next 2% is matched 50 cents to the dollar.

TSP Vesting Rules

Vesting rules for the TSP apply to Agency Automatic Contributions. According to the TSP website, you become vested in, or entitled to keep these contributions, only after a prescribed period of government service which is normally three years.

Rules for Military TSP Participants

Military members are not currently eligible for TSP matching funds or agency automatic contributions due to the generous retirement system they have in place.

In addition, the following rules apply specifically to military participants in the Thrift Savings Plan:

  • You can also contribute from 1% to 100% of any pay, including incentive, special, or bonus pay, as long as you are already contributing from your basic pay.
  • You can elect to contribute from incentive pay, special pay, or bonus pay, even if you are not currently receiving them. These contributions will be deducted when you do receive any of these types of pay.
  • You cannot contribute from sources such as housing or subsistence allowances.
  • If you are receiving tax-exempt pay (i.e. pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt. You may also contribute more of your pay to the TSP during the year.
  • Be aware that if you do contribute tax-exempt pay, your total contributions from all types of pay must not exceed the Internal Revenue Code (I.R.C.) section 415(c) annual addition limit for the year. This limit does not include catch-up contributions if you are allowed to make them.
  • You cannot make catch-up contributions from tax-exempt pay, incentive pay, special pay, or bonus pay.
shadowbox us military hero

Current TSP Investment Choices

The TSP offers a number of investment choices depending on your risk tolerance and number of years until retirement. These fund choices include:

  • G Fund. The G fund is the default investment fund for the TSP. It consists of government securities that offer low volatility and conservative returns over time. If you don’t actively choose a different fund (such as those below), all contributions to your TSP will default into the G fund.
  • F, C, S, I Funds. The F, C, S, and I funds are index funds which individually represent different investment strategies and are managed by BlackRock Funds. Participants who choose to determine their own asset allocation will be instantly attracted to these investment options.
  • L Funds. The “L” in L Funds stands for life cycle. The L funds are a recent addition to TSP investment choices and allow investors to choose a date closest to their expected retirement date, by which asset allocation is determined and periodically adjusted into more conservative investments as retirement nears.

Benefits of TSP Participation

  1. Matching Funds and Agency Automatic Contributions. Ever turn down free money? I didn’t think so. If you are a FERS employee and are not contributing at least 5% of your basic pay to the TSP, you are losing out on an extremely generous matching program, and in turn, one of the major benefits offered by your employer. Matching funds and agency automatic contributions make TSP participation a no-brainer.
  2. Minimizes Current Tax Burden. Because contributions to the TSP are made before your income tax is calculated, participating in the TSP actually minimizes your annual tax burden. For those Americans in a higher tax bracket (and everyone else), it’s always a good idea to shelter your earnings whenever possible.
  3. Offers Long Term Tax Benefits. Since your earnings compound tax-free over a long period of time, the tax shelter offered by the TSP is significant. This is especially true when you consider that you’ll likely be in a lower tax bracket when you begin taking distributions in retirement.
  4. Extremely Low Expense Ratios. The TSP offers some of the lowest expense ratios in the business, which allows you to keep more of your money over the long-term. Low expenses can have a significant effect on the long-term compound growth of your portfolio and could amount to many more thousands of dollars over time.
  5. Numerous Long-Term Withdrawal and Maintenance Options. When you leave federal service, you will have a number of options regarding what to do with the funds in your TSP account. You may choose to leave funds where they are, transfer them to an IRA or company 401k, or make long-term 401k transfers from your next employer into your TSP account.

Downsides of TSP Participation

  1. Less Take Home Pay. The fact is, contributing to the TSP will decrease your take-home pay. However, when you factor in agency contributions and tax benefits, the downside may not be as extreme as you think.
  2. Limited Fund Choices. Although the TSP offers more choices now than it historically has, there is still a fairly limited choice of funds within the TSP compared to other retirement plans.
  3. No Matching Funds for Military. For military members, the lack of TSP matching funds has always been a downside of contributing to the TSP.
  4. No Individual Stock Purchasing Options. Along with a limited amount of funds to choose from, the TSP does not offer the ability to choose individual stocks, a fact that may bother DIY investors.
  5. Contribution Limits. Like most employer-sponsored retirement plans, the TSP has contribution limits. If you’d like to contribute additional monies toward retirement, you can look at opening a Roth or traditional IRA or an annuity.

Final Word

The TSP is not just an advantageous way to save for retirement, but it may even be essential. The future of Social Security looks bleak at best, so it’s up to you to make the most of benefits like matching funds, agency automatic contributions, compound growth, and tax incentives.

If you are eligible to participate and have not yet begun contributing, there is no time like the present to start. The benefits to participation greatly outpace the limited downsides, and you’ll be well on your way to securing a healthy retirement.

Are you a TSP participant? What are your thoughts on the benefits of the program?

(photo credit: Shutterstock)

Pat S
Pat S is an active duty military officer. On his off time he enjoys working out, reading, writing and spending time with his dog. Pat became interested in personal finance after several costly mistakes early in his military career that could have been avoided by a basic understanding of personal finance.

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  • Franki

    Hello,
    I retired from USPS 5/30/2011 with the VERA and I am FERS. I contributed the max from my pay each year(16,500+ 5,500 catch up) each year to TSP, When I decided to retire, it was April, I had already allocated the “spread ” to contribute to the TSP. I tried to increase the amount I put in at the end, to put in the maximum,, but the change did not go thru. I had only been able to put in 11,465. + 2332. total. It is only October now and not being an employee anymore I do not have the access to liteblue to make contributions.
    My question is: When my Incentive check comes in November, will I be able to put that money into my TSP? does anyone know? If so how do I do this?
    Thank you , any advice is helpful.

    FL

  • Gary

    A representative from the USPS retirement assistance told me that my TSP account will only pay 50% of its value to my beneficiary after age 591/2 and I should get out of TSP and roll it over into an annuity. Is this true?

    • naseth

      Yes. The account won’t mature fully until you reach 70 and 1/2. The average life expectancy was 63 in 2001. That means only half of the money you put in there will go to your heirs.

  • Mcdonald Priscilla

    I have a two other company retirement plans, one from the state and one from a contracted state agency. I read it is best to roll these into one plan so you are not paying administrative fees on three plans so how do I go about combining the amounts from the other plans to Thrift Savings plan and I will be 59 and a half March 2013. Should I do this now or wait till March or does it matter.

  • Steve

    Not true! You are required to begin withdrawals at age 70 1/2. You can begin withdrawals at an earlier age. Do YOUR homework.

  • Bill

    My broker advises me that the value of all bond funds will decline when “tapering” begins. Is this true even for the TSP G fund?

  • Chloe

    What happens to my TSP account when I retire? Must I find a financial firm to transfer it to in order to set up and administer an annuity, or whatever?

    • Janet

      Talk to your benefit office. When I left the federal workforce for several years, my TSP funds stayed in my name, and I could still move money from one fund to another, although I couldn’t add new money. I did not need to use any financial firm to transfer it or manage it, although I think it was possible to transfer the money into another retirement account (and use a financial firm if I wanted to). I saw no reason to mess with this money, though, and my TSP money continued to do whatever the funds the money was in did while I was employed elsewhere-and I paid no taxes since I did not take the money out.

  • Brick By Brick Investing

    I think this is a great retirement program for federal employees but gives no incentive to service members to contribute.

    • Dave (not really)

      Actually, it does. People can’t bank on being able to retire with 50% of their base pay, especially with a liberal political influence. At the same time, the military is radically reducing its force numbers right now, so it’s even more important to be saving. Now, if you mean “no incentive” over and above a mutual fund with USAA, for example, they’re pretty different things. I happen to have ~$160K in TSP, $55K+ in mutual finds with USAA and have been in for 12 years (came in with nothing to my name), so it’s paid off.
      Additionally, looking at that ~$160K, I’ve only CONTRIBUTED $87K to the funds, so I’d say that’s a pretty good return on my money.

  • Mike

    I wish they had this for the military when I was in!

  • Mike

    That’s not true. You can take it in lump sum if you want at the time of retirement. Or, you can take part of it in a large amount and then take a annuity each month based on what’s left. You can elect not to withdraw any at retirement but at age 70 you “must” do something…take it lump sum…take an annuity….take it any way you want but you must DO SOMETHING starting at age 70.

  • Andy

    Notice when he said Social Security looks bleak, funny thats always the first thing to go but notice never Welfare one is worked for and the other is expected. More free money for the SXXT Bags of this country

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