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What Is the Thrift Savings Plan and How Does It Work?

When it comes to retirement planning, you probably hear a lot about 401(k)s. But if you’re a federal employee or in the military, you don’t have a 401(k). But, believe us, that doesn’t mean you can’t build wealth for the future. You can contribute to the federal Thrift Savings Plan—and that’s great news!

Turns out, the Thrift Savings Plan is a pretty big deal. As far as defined contribution plans go, the TSP is the largest in the world, with over $558 billion in assets.1

Over 5 million people have a Thrift Savings Plan account, and—even better—89% of participants are satisfied or extremely satisfied with the Thrift Savings Plan.2

Now, the key to investing in the Thrift Savings Plan is to invest consistently and choose the right funds to help you build wealth for the long term. And that can be scary, especially if you’re new to investing. The good news is that with a little information about the Thrift Savings Plan and the funds it offers, you can make it work for you.

Let’s dig in and we’ll show you how.

What Is the Thrift Savings Plan (TSP)?

The Thrift Savings Plan, also known as the TSP, was introduced in 1986 as part of the Federal Employees’ Retirement System Act. The TSP was created to give federal workers the opportunity to invest in a tax-advantaged account for retirement, similar to a 401(k) plan.3

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Just like a 401(k), TSP contributions can be taken straight out of your paycheck, and you can invest that money in a variety of different funds. We’ll dig into those fund options and which ones we recommend later.

Who Is Eligible for the Thrift Savings Plan?

In order to be eligible to contribute to the TSP, you must be employed by the federal government or be a member of the military. Most federal government employees have access to the TSP, but if you’re not sure, check with your benefits office.

What Is the Difference Between Traditional TSP Contributions and Roth TSP Contributions?

When the Thrift Savings Plan was created, there was only one tax treatment option available for your contributions: traditional. But in 2012, the Thrift Savings Plan started accepting Roth contributions as well.4 Now when you contribute to your TSP account, you can choose between either a traditional tax treatment or a Roth option.

What’s the difference? We’re glad you asked!

Traditional

With a traditional tax treatment option, your contributions are made with pre-tax dollars (taken out of your gross earnings), but you have to pay taxes on your withdrawals in retirement based on your tax bracket at that time.

Roth

Roth contributions are made after taxes have been taken out of your paycheck. That means you’ll pay taxes on the money before it goes into the TSP. Here’s the good news: When you make Roth contributions, that money grows tax-free and you won’t pay any taxes on the money you take out when you retire.

We always recommend going with a Roth option when you have the chance. First of all, there’s the tax benefit. If you still have decades before you retire, there’s no guarantee that tax rates won’t go up. But if you’ve already paid taxes, you don’t have to worry about that.

The second benefit is an emotional one. Wouldn’t you rather pay $100 in taxes on a paycheck today instead of watching your hard-earned nest egg decrease by hundreds of thousands later?

When you start early with Roth contributions, you don’t even miss money that goes toward taxes because you’re used to it. And then the nest egg you worked so hard to build is all yours in retirement.

What Are the TSP Contribution Limits?

For 2021, the contribution limit for your Thrift Savings Plan account is $19,500. If you’re 50 or older, you can take advantage of the catch-up contribution limit and contribute an additional $6,500 a year.5

Do You Get a Match on Your Contributions?

Another great part of the Thrift Savings Plan is the match you get from your agency or service on your contributions if you’re part of the Federal Employees Retirement System (FERS) or Blended Retirement System (BRS).

If you are part of FERS or BRS, your agency or service starts contributing 1% of your pay. Depending on which system you’re in, you could start receiving that contribution immediately or after 60 days in service. You get that 1% even without contributing anything on your own.

On top of that 1% contribution, you’re eligible for a match up to an additional 4% after two years of employment. The government offers a dollar-for-dollar match on the first 3% you contribute. Then they match the next 2% at 50 cents on the dollar. So, if you contribute 5% of your pay, you can get the full match. That’s an additional 5%!

Getting a match on your contributions is free money! That’s why it’s important to invest at least enough to get the match. Most TSP participants are on top of it: Around 80% of those contributing to a TSP account are putting in at least 5% of their pay to get the full match.6

Keep in mind that the match your agency or service puts in your account will be taxed in retirement, even if you make Roth contributions.

How Much Should You Invest in a TSP Account?

We recommend investing 15% of your income for retirement. When you contribute 15% consistently, you set yourself up to have options when you retire. You also leave enough margin in your budget to make progress on other financial goals like saving for college and paying off your house.

So how much of that 15% should be invested in your TSP account? As we mentioned, you should invest at least enough to get the full match, as long as you’re eligible for it. Don’t leave free money on the table.

Once you’ve contributed enough to get the match, work with your financial advisor to open a Roth IRA. With a Roth IRA, you can take advantage of the tax-free growth and withdrawals and choose from more funds than the TSP offers. If you max out your Roth IRA and still haven’t hit 15%, go back to your TSP account and invest the rest.

If for some reason you don’t get a match on your contributions, start with a Roth IRA. It’s easy to sit down with an investment professional and talk through your options. They can help you open a Roth IRA and choose the funds that best suit your needs. Once you’ve maxed out your Roth IRA, you can invest the remaining amount in your TSP account until you hit 15% of your gross salary.

What Types of Funds Does a TSP Offer?

The TSP offers five different individual fund options, each one invested in either short-term U.S. Treasury securities or U.S., international, or bond index funds.

  • The Government Securities Investment (G) Fund

  • The Fixed Income Index Investment (F) Fund

  • The Common Stock Index Investment (C) Fund

  • The Small Capitalization Stock Index (S) Fund

  • International Stock Index Investment (I) Fund

Before we share more about these fund types and which ones I recommend, let’s talk about the different ways you can manage these funds. With the TSP, you have two options. You can choose to invest in any of the five individual investment funds. Or you can invest in a Lifecycle fund—a fund that has a preselected ratio of these five individual funds. What’s the difference? We’ll explain it.

Lifecycle Funds

Let’s start with Lifecycle funds. A Lifecycle fund, or L Fund, is similar to a target date fund—one that’s based on the year you plan to retire.

Lifecycle funds include all five individual TSP funds. But the ratio of those five funds adjusts quarterly so your L Fund becomes more conservative as you get closer to retirement.

For example, a 2040 Lifecycle fund is for participants expected to retire anywhere between 2035 and 2044. Currently, a 2040 L Fund is more aggressive and risky, but it will continue to transition to being more conservative as participants approach retirement. Meanwhile, a 2020 L Fund is in protection mode at this point since participants in this L Fund are closer to retirement. Their nest egg is being sheltered from losses—and growth.

Lifecycle funds can seem appealing because once you invest in one, it adjusts automatically. But this is your future we’re talking about, people! A computer doesn’t know you, your financial situation, or your goals for your golden years. That’s why we're not a fan of Lifecycle funds or target date funds.

Individual Investment Funds

What about individual investment funds? If you choose this route (and it’s the one we recommend), you can choose how you want to balance the five fund types. You can even skip the ones you don’t want to be part of your portfolio. You have complete control over your investment.

Though these funds are the ones that make up Lifecycle funds, if you invest in them on your terms and according to your needs, you remain in control—rather than putting your future in the hands of a computer. Individual investment funds don’t offer as many investment options as a Roth IRA, but they’re still a much better choice than a Lifecycle fund if you choose the right mix. That’s why we want you to stay away from Lifecycle funds and stick with individual investment funds that keep you in the driver’s seat.

What Funds Should You Choose?

Let’s recap. When it comes to selecting which individual investment funds you want in your portfolio, you have these five options:

  • The Government Securities Investment (G) Fund

  • The Fixed Income Index Investment (F) Fund

  • The Common Stock Index Investment (C) Fund

  • The Small Capitalization Stock Index (S) Fund

  • International Stock Index Investment (I) Fund

So which funds should you choose for your TSP account? Here’s our advice:

Stay away from the G and F Funds, which offer little opportunity for growth. Stick with the C, S and I Funds. Here’s the ratio we recommend for your portfolio:

  • 60% in the C Fund, which tries to match the Standard & Poor’s 500 index’s performance

  • 20% in the S Fund, an option with aggressive stocks that can offer a high rate of return

  • 20% in the I Fund, an international fund that invests in stocks from overseas companies

If you want more information about the funds in the TSP, sit down with an investing pro. They can help you choose the right funds, while also keeping your whole retirement picture in mind.

Work With an Investment Pro

You’ve worked too hard to end up broke in your retirement years. That’s why it’s so important to partner with an investment professional or financial advisor to take advantage of the investing options you have. A financial advisor can help you make decisions about your Thrift Savings Plan account so you feel confident about your retirement.

Need help finding an investment pro? Try SmartVestor, a free way to find a qualified investment pro who can create a wealth-building plan based on your specific situation and goals for the future!

Find your investment pro today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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