Thrift Savings Plan (TSP)

If you are a federal employee or military service member, you have the option to contribute to the Thrift Savings Plan (TSP), which is a tax advantaged retirement account. If you have never worked for the federal government before, you can think of a TSP as the federal equivalent to your private employer’s 401(k). It offers a lot of tax savings and is a great tool to save for retirement and ensure your future financial freedom.

Traditional TSP vs. Roth TSP

Traditional and Roth TSPs operate very similarly to traditional and Roth IRAs. A traditional TSP is funded from your money prior to it being taxed. In other words, if you contribute $1,000 to the account, you will not pay taxes on that $1,000 now. Rather, when you start withdrawing funds from the traditional TSP, you will pay taxes on your initial contributions and any growth or interest earned. Alternatively, a Roth TSP is funded with money that has already been taxed. For example, say you earn $1,000 and want to contribute it to your Roth TSP. If your taxes are 15%, then you will have $850 remaining to contribute to the account. However, the primary difference with a Roth TSP is there are NO income limits. While a Roth IRA restricts your ability to contribute if you make more than the established income limit, you can continue to contribute to your Roth TSP regardless of how much you earn. That is great news, as a Roth TSP will typically yield higher returns in the long-term, so switching from a traditional TSP to a Roth TSP is something you should consider. By default, you are enrolled in a traditional TSP, so if you begin making contributions to your TSP without making any adjustments, they will go into a traditional account.

TSP Fund Types

Unlike some retirement accounts that allow you to invest in almost any individual stock, bond, or ETF, the TSP has a small selection of funds to choose from. These funds include the G Fund, F Fund, C Fund, S Fund, I Fund, and L Fund. The L Fund is not necessarily a fund in itself, rather it is a lifecycle fund that consists of a mixture of the other five funds.

L Fund

If you elect to utilize the L Fund, you will select the L Fund that corresponds to your expected retirement year. For example, if you plan to retire in the year 2040, you would select L 2040. As you get closer to retirement, your funds are automatically reallocated from individual funds with higher returns and higher risk into funds with lower returns and less risk. Thus, the L Fund operates on the principle that as you get closer to retirement, you want your investments to be less volatile because there is a likelihood you will need them in the near-term future. In contrast, if you are 20 years from retirement, a dip in the stock market will not have an impact because the market will have time to readjust before you retire.

G Fund

The G Fund consists of short-term U.S. Treasury securities. A Treasury security, sometimes also referred to as a treasury bond, is a debt obligation from the U.S. Department of the Treasury. They are extremely secure and low risk because they are guaranteed by the United States Government. The Treasury securities in the G Fund are a little unique in that they are non-marketable and issued only for the TSP. While extremely secure, the downside of the G Fund is the very low return. In general, you can expect the G Fund to provide the lowest return of any of the funds. As a result, you risk inflation potentially outpacing the return rate of the G Fund, so the amount you have invested may actually be worth less over time than what you invested thanks to the time value of money (money now is worth more than the same amount of money in the future). This intuitively makes sense. Consider the price your grandparents paid for their home versus the current prices.

F Fund

The F Fund consists of bonds. Bonds are loans that you provide in exchange for repayment at a future point, as well as interest payments on the principal that you loaned. They are different from stocks in that you do not have any ownership in the company. Rather, you are a lender to the company. The F Fund mirrors the Bloomberg U.S. Aggregate Bond Index, so you can expect similar returns.

Stock Funds – C Fund, S Fund, I Fund

The C Fund, S Fund, and I Fund are all different variants of stock funds. When you invest in these funds, you are purchasing stock, which is ownership in a company (or multiple companies in the case of these funds). The C Fund mirrors the Standard & Poor’s (S&P) 500 Stock Index. If you go to TSP.gov, you can see the top 10 holdings for the fund. Overall the C Fund is a great investment choice for many, as the long-term performance of the S&P 500 is impressive.

The S Fund is a small cap stock index fund that invests in small and mid-sized U.S. companies. It attempts to mirror the Dow Jones U.S. Completion Total Stock Market Index. You are accepting a little more risk with the S Fund than the C Fund because smaller companies are less capable of handling economic recessions than larger companies. However, with the increased risk, there is a potential for increased rewards in the form of higher returns, as smaller companies have much larger upside potential for growth.

The last of the stock funds to discuss is the I Fund, which invests in international stocks. Since, it invests in non-U.S. companies, it provides the potential for greater diversification. The I Fund holds stocks in companies from many developed countries. Some of the top holdings include countries like Japan, United Kingdom, France, Germany, Switzerland, and Australia.

TSP Expense Ratios

Each fund has a different expense ratio. However, all the expense ratios are extremely reasonable. Therefore, you can confidently utilize the TSP without the fear that you are overpaying the fund managers. For example, as of 2023, you can expect the expense ratio to be around 0.043% to 0.059% or $0.43 to $0.59 per every $1,000 you have invested.

TSP Contribution Limits

The TSP has the same contribution limit maximums as a private employer 401(k). As of 2024, federal employees and military members can contribute up to $23,000. If you are 50 or older, you are allowed to make catch-up contributions of an additional $7,500, allowing a total annual contribution of $30,500. The amounts are significant, so take advantage of the huge tax savings and low expense ratios by contributing as much as you can afford.

Conclusion

The TSP offers five great funds to choose from, as well as the lifecycle funds that consists of a mixture of these five funds. You can utilize either a traditional TSP or Roth TSP to take advantage of tax savings and pursue your retirement goals. Note that the Roth TSP has no maximum income limits. Unless you are very close to retirement, the G Fund is likely not the right fit for you because, in the long-term, inflation can significantly reduce the actual returns. However, a mixture of the other funds can be great for your portfolio. The F Fund allows you to invest in bonds while the C Fund, S Fund, and I Fund offer different stock investment options. Personally, my preference is the C Fund. Warren Buffett’s recommendation to average investors is to consistently invest in an S&P 500 Index Fund, and the C Fund is just that. Look at the return rates for each fund, educate yourself on the potential risks and benefits, and go to TSP.gov to change your fund allocations to make your money work for you.