Options For Your Thrift Savings Plan (TSP)

Chris Reddick |

The Thrift Savings Plan (TSP) is a retirement saving and investment plan for Federal employees and members of the military. The TSP is a defined contribution plan, similar to a 401k plan. In a defined contribution plan, what you get upon retirement is what you contributed towards the plan plus any earnings. The retirement income you receive from your TSP account will depend on how much you (and your agency, if applicable), put into your account during your working years and the earnings accumulated over that time. The annual contribution limit in 2020 for the TSP will be $19,500, up from $19,000 in 2019. You can have both a traditional and Roth TSP at the same time.

The TSP is the largest defined contribution plan in the world, with over $5 billion in assets. Over 5 million people have a TSP account, and 89% of participants are satisfied or extremely satisfied with the Thrift Savings Plan.1 The TSP has a tremendous impact on the ability of our hard-working federal workers and the military to have a successful retirement. 

One of the greatest benefits of the TSP is very low expenses. In 2018, the average expense ratio for TSP funds was just 0.04%, a rate well below what’s charged for popular private sector investment options, like Vanguard mutual funds (.11%), or BlackRock’s LifePath Index Funds (.09%).2 Research shows that low expense globally diversified index funds are smart choices for investors. Even with a fraction of a percent increase to a fund’s expense ratio can mean significantly lower retirement savings in 30 years.

One of the major criticisms of the TSP is the limited selection of investment choices. The TSP only offers five different individual fund options.3

    • G Fund: The Government Securities Fund is invested in, as its name states, U.S. government securities. This offers the lowest volatility, and you can earn interest income without fear of losing your principal investment.
    • F Fund: The Fixed Income Fund is invested in government, corporate, and mortgage-backed bonds and aims to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. This fund offers low to moderate risk.
    • C Fund: The Common Stock Index Fund matches the S&P 500, which is comprised of medium and large U.S. companies. This fund offers moderate risk.
    • S Fund: The Small Capitalization Stock Index Fund is slightly riskier because it invests in small and medium U.S. companies that aren’t in the C Fund. This fund matches the Dow Jones U.S. Completion Total Stock Market Index.
    • I Fund: The International Stock Index Fund matches the performance of the MSCI EAFE (Europe, Australasia, Far East) Index, comprised of stocks of more than 20 developed countries. This fund is more volatile than the C Fund.

With the TSP, you have essentially two options. You can choose to invest in any of the five individual investment funds shown above. Or you can invest in a Lifecycle fund (L-Funds)—a fund that has a preselected ratio of these five individual funds. However, with these limited choices, an investor cannot choose, for instance, to invest in Environmental, Social, and Governance (ESG) funds since there is not fund on the list.4 In addition, Congress occasionally tries to interfere with investment choices for political reasons without much success.

Under the new regulations to modernize the TSP, that went in effect in September 2019, the TSP is much more flexible in its withdrawal strategies.5 Once you leave a federal job, you have a few options for what to do with the money in your TSP. You can leave the money in your TSP and let your investments keep growing — a smart choice for many — and you won’t have to start taking money out of the TSP until age 72. Another option is that you can roll your investments over into another qualified retirement account such as an IRA. Your last option is to withdraw some or all of the money. This option has a penalty if you’re not 55 years or older retired or separated from service. In order to withdraw money without facing a 10% tax penalty from a TSP while you’re still working for the federal government, you’ll generally need to be at least 59½ years old.

The most widely held misconception about the TSP is that you will face a 10% early withdrawal penalty on anything they take out of the TSP before they reach the age of 59 ½.6 If you are a regular employee that separates and withdraws money from the TSP in the year in which you reach the age of 55 or later there is no early withdrawal penalty. If you are a special category employee, the age is 50 such as federal law enforcement officers. It’s Individual Retirement Arrangements (IRAs) that assess early withdrawal penalties for money taken out before age 59 ½. While the TSP (and other employer-sponsored plans) do not!

Overall, the TSP is a smart choice for federal employees and members of the military. It has low-cost index funds with global diversification --a smart choice for investors. Most of the guesswork is done for you since you only pick one fund! While these are far fewer investment options than many employers offer in their 401(k)s, choosing between a smaller number of options may be suitable for many investors.

For some investors, this can be a good choice to eliminate the guesswork, but for others that want more choice in retirement, this can be very problematic. As a result, when approaching retirement or separating from service, it is advisable to speak to a financial advisor to determine whether the TSP fits your goals or whether you should roll it over into another plan.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

1. https://www.daveramsey.com/blog/what-is-the-thrift-savings-plan

2. https://www.forbes.com/sites/elenabotella/2019/09/17/tsp-changes-september-2019/#ebc66f87e819

3. https://www.tsp.gov/InvestmentFunds/index.html

4. https://www.nytimes.com/2020/01/17/your-money/thrift-savings-plan-esg-401k.html

5. https://www.tsp.gov/PlanningTools/LivingInRetirement/withdrawalStrategies.html

6. https://www.fedweek.com/tsp/widely-held-misconceptions-thrift-savings-plan/


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