Five Important Facts to Remember About the TSP

The Thrift Savings Plan – here’s a list of fast facts that you should keep in mind.

Welcome to part three of our series of “listicles.” We’ll be going over 5 key points to remember for several areas of retirement planning and employee benefits for members of the Federal Workforce. The first topics we covered were FERS and CSRS. Now we’ll be covering the TSP.

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1. What is the TSP?

The Thrift Savings Plan (TSP) was started in the 1980s along with the new FERS system. In fact, with Social Security, the TSP, and the FERS pension are known as the “three-legged stool.” Theoretically, a FERS employee can rely on these three sources of income to build a comfortable retirement. The TSP is a defined contribution plan similar to that of 401(k)s in the private sector, but it is governed by the Federal Retirement Thrift Investment Board (FRTIB) and not regulated by ERISA (Employee Retirement Income Security Act) like 401(k)s. At its inception, the TSP began with 3 core funds: the G, F, and C funds in 1987. The I and S funds were added in 2001.

2. Contributions: Max and Match

For Federal Employees, TSP contributions are completely voluntary. Although when hired, new employees are automatically enrolled, contributing 1% of their paycheck, they can request these initial contributions be refunded and make zero future contributions. If trying to save for retirement, this isn’t the way to go. The Government, and the specific employing agency, will together match employee contributions, up to 5% of a FERS worker’s salary. Putting in 5% and getting the full match beats contributing nothing, but to really optimize use of the TSP, feds should aim to contribute the annual maximum, if possible – including catch-up amounts if the contributor is age 50 or older. These limits are set by the IRS. For 2023, the maximum amount that can be contributed to the TSP is $22,500 with the additional catch-up amount being $7500.

3. Investment Options

The core TSP funds are the aforementioned G, F, C, S, and I funds. The G-fund is a unique investment, which has a return that is tied to US treasury rates. This fund’s rate of return is usually at relatively low levels compared to the other core funds, but it is guaranteed to never provide a negative return. The “F” in F-fund stands for “Fixed Income” and comprised of corporate and government bonds. The C-Fund tracks the S&P 500, which contains what are know as “blue chip” equities. The “S” in S-fund supposedly stands for “Small Cap” stocks, but really it tracks a market completion index so it contains stocks from companies of all sizes, including small and medium. The “I” in I-fund stands for “International” stocks and tracks an index that contains investments from other countries. The Lifecycle Funds, or “L funds” are preset allocations of all the core funds that are designed based off retirement targets. If a fed is aiming to retire around the year 2045, then the “L-2045” fund, for example, might be a good choice for investing. If possible, though, working with a financial advisor to determine a more individual mix of the funds can be beneficial. And lastly, there is the new mutual fund window that contains over 5000 mutual funds to choose from. The window comes with a handful of restrictions, costs, and caveats, though, so it is best to do your research before “opening the window." For more information about the TSP’s investment choices, check out this page.

4. Roth vs. Traditional

There are two types of TSP accounts that federal employees and military members can contribute to – traditional and Roth. Unlike Roth IRAs, there are no income levels that restrict deposits into a Roth TSP account. Any government matches received have to put into a traditional TSP, though, so feds either have just a traditional account or both. The biggest difference between the two is that contributions into a traditional TSP are pre-tax and money put into a Roth TSP is post-tax. When withdrawing the funds, qualified disbursements from a traditional TSP are considered ordinary income and subject to taxation. For the Roth TSP, qualified withdrawals are not taxed at all. This can have reverberating effects in retirement.

5. TSP Expenses

In a recent article, we took a look at the increasing expense ratios of the TSP funds. Since its inception, the TSP’s core investment funds have been relatively cheap when it comes to administrative and management fees that are associated with almost every similar type of investment fund. But the TSP funds used to be the absolute lowest in the industry and that is no longer the case. While still competitive, the expense ratios have been steadily climbing. In 2007, for instance, the average expense ratio for the TSP funds was 1.5 basis points (0.015% of money invested went toward this fee) but had risen to 2.9 basis points (0.029%) by 2013. Ten years later, the current average cost of the TSP’s core funds is at 6.9 basis points (0.069%), which is an increase of almost 138%!

Next Steps

If you’d like to dive into more detail about TSP check out this page. On that page, you can also register for the next TSP webinar with Ed Zurndorfer. It’s never too early (or too late) to learn about your federal retirement and start making a plan! For an even deeper dive into your benefits as a federal employee, check out our entire (no-cost) webinar series.

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Until Next Time,

The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **

***The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***