The Thrift Savings Plan (TSP) is a federal government-sponsored retirement savings and investment plan. The purpose of the TSP is to provide retirement income.
The TSP is a defined contribution plan. The retirement income that you get from your TSP account will depend on how much you have contributed to your account during your working years and the earnings on those contributions.
The Thrift Savings Plan is similar to the retirement benefits that many private corporations offer their employees under so-called "401(k)" plans.
Thrift Savings Plan: Your Investment Mix
Your investment mix is the most important factor affecting the performance of your TSP account. You have five TSP funds that you can invest in and five more funds known as "Lifecycle" funds that invest in the main five funds based on your retirement trajectory.
The five main funds are:
- The G Fund: This fund invests in government securities and is the safest fund. You won't lose money investing in this fund, but your rate of return is the lowest.
- The F Fund: This fund invests in U.S. government, mortgage-backed, corporate, and foreign government bonds. Your risk is fairly low, but your rate of return is, too. Usually when stock markets go down, bonds go up in value.
- The C Fund: This fund invests in the stock market. The stocks are made up of the Standard and Poor's 500 (S&P 500) Index, a mix of stocks of 500 large to medium-sized U.S. companies. If the stock market goes up, you can make money. If it goes down, you can lose money. The risk is still higher than the F fund, but the rate of return is higher, too.
- The S Fund: This fund invests in the stock market, too, but this time instead of big companies, it invests in smaller companies that aren't in the S&P 500. The risk is still higher than the C fund, but the rate of return is higher, too.
- The I Fund: This fund invests in international stock markets. This is the riskiest fund, but you may also make the best rate of return from it.
If you're not a gambler or a stock market whiz, you may want to invest in the Lifecycle Funds. These funds are run by the Thrift Savings Plan people and automatically invest in all of the above funds according to what the experts think is the best strategy for you based on your age and prospective retirement status.
For example, if you are young, most experts say you can take chances with investing. You can make a lot of money in the riskier investments, and if they tank out, you still have enough time to make back the money you lose. However, if you are older (or closer to retirement), you don't want to bet everything on a risky investment, because if you lose money, you will most likely be unable to make up any loss before retirement.
Currently the TSP has the following L funds:
- The L 2025 Fund: Recommended for those who were born between 1958 and 1964 and plan to begin withdrawing from their TSP account between 2022 and 2027.
- The L 2030 Fund. Recommended for those who were born between 1965 and 1969 and plan to begin withdrawing from their TSP account between 2028 and 2032.
- The L 2035 Fund. Recommended for those who were born between 1970 and 1974 and plan to begin withdrawing from their TSP account between 2033 and 2037.
- The L 2040 Fund. Recommended for those who were born between 1975 and 1979 and plan to begin withdrawing from their TSP account between 2038 and 2042.
- The L 2045 Fund. Recommended for those who were born between 1980 and 1984 and plan to begin withdrawing from their TSP account between 2043 and 2047.
- The L 2050 Fund. Recommended for those who were born between 1985 and 1989 and plan to begin withdrawing from their TSP account between 2048 and 2052.
- The L 2055 Fund. Recommended for those who were born between 1990 and 1994 and plan to begin withdrawing from their TSP account between 2053 and 2057.
- The L 2060 Fund. Recommended for those who were born between 1995 and 1999 and plan to begin withdrawing from their TSP account between 2058 and 2062.
- The L 2065 Fund. Recommended for those who were born after 1999 and plan to begin withdrawing from their TSP account after 2062.
These funds rebalance their investments every three months to keep in line with the plan of being a more aggressive investor if you are young and a safer one if you are older.
There is one more fund, the L Income, for when you are retired and taking money out of the TSP. This fund's objective is to achieve a low level of growth with a high emphasis on keeping your money safe.
You can also invest in mutual funds through the TSP program.
TSP users may invest up to 25% of their total TSP balance in mutual funds, with a minimum investment of $10,000.
Users of the mutual fund trading portion of the TSP also pay additional fees to use the system, including a $55 annual administrative fee, plus a $95 annual service fee if they own any funds and a per-trade fee of $28.75. Specific funds may charge additional fees.
Thrift Savings Plan Contribution Limits
You can contribute any percentage (1 to 100) of your basic pay. However, your annual dollar total can't exceed the IRS limit. This limit changes each year. For 2024, it is $23,000, but if you are over 50, you can contribute another $7,500 each year.
Depending on which retirement plan you are under, the military may match your contributions up to 5% of your basic pay.
Thrift Savings Plan Benefits
Your TSP contributions may be tax-deferred. That means you don't pay taxes on the money until you take it out. So if you contribute $5,000 to the TSP now, that $5,000 will be taken off the top of the income reported to the IRS and won't show up on your W-2.
However, you can choose a Roth TSP. This mean you pay the taxes on it now, and when you withdraw the money, it is all (contributions plus interest) tax-free.
Which plan is better? That depends on your situation. Most experts say that the Roth is a better option for most people, though.
You can also transfer any amount of money from the TSP to other qualified retirement plans when you get out of the military.
There is a lot to consider when making any financial investment. To get important details on the Thrift Savings Plan, visit the official TSP website.
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