The Thrift Savings Plan (TSP) is the government version of a 401(k) retirement plan. It is available to U.S. military members and federal employees.
It’s similar to a 401(k) plan because both are employee-sponsored and defined contribution plans, which means each participant has a personal TSP account. Both are tax-deferred retirement plans and also have the same annual contribution limits.
However, there are some benefits and drawbacks to understand before you make a final decision on whether to participate in a TSP or not.
Advantages of the Thrift Savings Plan
Low Administrative Costs
TSP plans typically have administrative costs that are low by industry standards. For example, in 2021, the expenses averaged .043% per year, which means investors were only charged an average of $0.43 per $1,000 invested to manage their accounts.
In 2023, those fees were .048% for net administrative fees.
Part of the reason administrative costs are low is because TSP funds are all low-cost index funds, and the overhead on these is low. Also, the TSP doesn’t spend money on advertising like other retirement fund providers do, and this savings is also passed on to participants.
By comparison, as of July 2024, less than 1% of roughly 450,000 available investment options reported expenses below the TSP’s highest 2023 total net expense ratio.
Tax Deferred Benefits
The TSP is a tax-deferred retirement plan. This means money is taken from your paycheck and invested by the plan before any taxes have been taken out.
The money grows in an investment plan without taxes negatively affecting the value of the funds. However, taxes are assessed on funds when they are withdrawn as a qualified distribution when you retire.
Tax Exempt Benefits in Some Cases
The TSP recently added a Roth TSP option, but military service members who contribute to the TSP while deployed can make contributions with tax-exempt income. Since Traditional TSP contributions are made with pre-tax money, the TSP tracks these tax-exempt contributions, and members can withdraw them on a prorated basis with their regular TSP withdrawals.
Only the contribution can be withdrawn tax-free, and tax-exempt contributions are tracked on your TSP balance sheet. Go here to learn more about tax-exempt TSP contributions and withdrawals.
Automatic TSP Contributions
Federal employees who belong to the Federal Employees Retirement System (FERS) and were hired after July 31, 2010, are automatically enrolled in the TSP. There is an automatic contribution of 3% of their base pay, which is deducted from each pay period and deposited into the TSP.
There is also an additional agency automatic contribution of 1%, making employees eligible for agency matching contributions.
Employees can opt out when they are hired or stop, start, or change their contribution level at any time.
After signing up for the TSP, investments are automatically withdrawn from the employee’s paycheck and invested in the fund of their choice. If the employee doesn’t designate a fund, investments are deposited in the TSP G Fund by default.
Maximizing Matching Contributions
Civilian employees enrolled in FERS can make additional contributions of at least 5% of their basic pay to their TSP to receive full agency matching contributions.
Military members who joined after 2018 also automatically receive a contribution to the TSP when they enter the civil service. They can earn more money by making larger contributions of up to 5% of their salary up to annual contribution limits.
Before 2018, the military did not offer a matching contribution for military members, with limited exceptions. Service members enrolled in the High-3 or other retirement plans are not eligible for matching contributions.
In 2018, the military launched the Blended Retirement System (BRS), which offers a reduced pension in return for matching TSP contributions. All members who join the military after Jan 1, 2018, are automatically enrolled in the BRS.
Investing Bonuses and Special Pay
Military members can invest some or all of their bonuses and special duty pay to their TSP up to the annual contribution limit. Eligible pay and bonuses include special duty pay, retention bonuses, Hostile Fire Pay, Hazardous Duty Pay, and other bonuses.
Enrollment is Easy and Automatic
Enrollment is automatic for most service members and federal employees. However, if you opted out initially, signing up through your employer’s HR department or visiting the TSP website only takes five minutes.
Allocation Flexibility
TSP participants are allowed to change their contribution amounts and which funds they invest in each pay period if they want to do so. Reallocations or fund transfers of existing funds are allowed twice monthly. This limitation is waived if the extra transfers move money into the G Fund.
Easy Portability to and from Qualified Plans
It’s easy to roll over money from your TSP to IRAs and other tax-deferred investments after you separate from the military or federal employee service. You can also transfer money from qualified plans and accounts into your TSP while working or after separating.
TSP Loans
Active TSP participants can borrow money from their TSP account. Borrowers repay the loan with interest through payroll deductions or a direct debit, check, or money order if you’ve left federal service. The interest rate is fixed for the life of the loan and is the same as the G Fund interest rate for the month before the loan is requested. For example, in September 2024, the G Fund interest rate was 4.15%, corresponding to the loan interest rate.
Rates of Return
TSP has produced consistent and quality rates of return for several years. You can view those rates by fund here.
Lifecycle Funds Offer Diverse Target Dates
Eleven Lifecycle Funds (L Funds) are a diversified mix of the five individual funds (G, F, C, S, and I). Participants can customize their investment into a fund based on the best expected return for the amount of expected risk that is appropriate for an investor.
Every quarter (three months), the target allocations of all the L Funds except L Income are automatically adjusted, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates. When an L Fund reaches its target date, it goes out of existence, and any money in it becomes part of the L Income Fund. For example, in 2025, the L 2025 Fund will be rolled into the L Income Fund.
L Funds stick to their target allocations for an entire quarter regardless of what the markets do. However, to maintain each L Fund’s target allocation, administrators rebalance it at the end of every trading day by buying and selling the individual funds that make up the L Fund so that the percentages go back to what they were at the beginning of the day, essentially buying low and selling high at the end of every trading day.
Several Ways to Connect with Plan Administrators
Although some participants have complained about responsive customer service, the TSP does offer several ways to reach out for customer service issues and answers. You can connect through virtual assistant, email, phone, and regular mail. To see specific contact information, go here.
Disadvantages of the Thrift Savings Plan
While there are many things to like about the Thrift Savings Plan, there are also some drawbacks to be aware of.
Contribution Limits
The TSP follows the same contribution guidelines as 401(k)s. In 2024, that amount is $23,000, but participants 50 and older can make “catch-up” contributions, up to an additional $7,500 per year.
The total amount a member can contribute annually is up to $69,000 under the Max Annual Addition Limit. That amount includes agency-matching contributions and contributions above the $23,500 limit made in tax-exempt zones.
If you’re over 50, you can make up to $7,500 in catch-up contributions, with a maximum yearly addition of $76,500.
Limited Investment Options
Unlike 401 (k) plans, the TSP offers only six investment fund choices, all based on index funds. Index funds allow investors to buy a bundle of stocks that tracks a single market sector.
Those fund choices include:
G Fund – Short-term U.S. Treasuries specially issued to the TSP. The U.S. Government guarantees payment of principal and interest. Thus, there is no credit risk. The G Fund offers the opportunity to earn interest rates similar to those of long-term Government securities but without any risk of loss of principal and very little volatility of earnings.
F Fund – U.S. Corporate Bonds that seek to match the performance of the Lehman Brothers U.S. Aggregate (LBA) Index, a broad index representing the U.S. bond market.
C Fund – Large U.S. Companies (S&P 500) that seek to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index comprised of stocks of 500 large to medium-sized U.S. companies.
S Fund – Small U.S. Companies (Wilshire 4500 Index) that seeks to match the performance of the Dow Jones Wilshire 4500 Completion (DJW 4500) Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.
I Fund – International Fund that seeks to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.
L Fund – Lifecycle Funds (Target Date Funds) diversify participant accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes tailored to different time horizons.
You can also visit the TSP home page and click on Fund Options for more detailed fund objectives and information.
Payouts May Take a While
TSP disburses partial and total withdrawal and distribution payments each business day. However, participants who are separated from service and request installments are issued installments on the 15th (or the next business day) of the month they’re due.
Payments not sent directly to an IRA or an eligible employer plan can be sent electronically to a checking or savings account by direct deposit, or participants can have a check mailed to them.
Payout Penalties for Some Early Withdrawals
If you separate and take money from your TSP before the year you turn 55, you will owe a 10% early withdrawal penalty on your traditional TSP withdrawals plus the regular federal income tax that is due.
The rules are different for special category employees. They can avoid the penalty if they separate during the year they turn 50 or have 25 years of qualifying special category service.
Spouses Have Access to Your Account
Spouses have certain rights to a TSP account. These rules apply even if you’re separated from, but still married to, your spouse.
Spouses’ rights apply to withdrawals made during and after federal employment, and rules apply to in-service withdrawals and post-employment distributions.
Limited External Software Program Tracking
TSP accounts cannot link to home finance programs such as Quicken or MS Money. Participants can manually input data into these programs, but there is no automatic download feature.
This can create extra time, attention, and effort to accurately track personal finances.
Contributions Can Only Take Place During Government Service
When your military or civilian service ends, you can no longer contribute to your TSP. You can leave your existing funds in the TSP or roll them over to a different 401 (k) or traditional IRA.
Tax Rules about TSP Payments
NOTE: Tax rules are complex, so you may want to speak with a tax advisor or the Internal Revenue Service (IRS) before taking money from your TSP account.
While not technically a disadvantage, it’s essential to be aware that all TSP withdrawals and distributions are reported to the IRS, to the appropriate state tax agencies if applicable, and to participants on IRS Form 1099-R,
In most cases, the TSP must withhold part of the taxable portion of a withdrawal or distribution for federal income tax. In some cases, participants may have the flexibility to request a different percentage, or nothing is withheld.
Also, the TSP does not withhold state or local income taxes, but participants are still obligated to pay these tax burdens if required.
For detailed information, including a table that shows withholding rates and the rules that apply to each type of TSP payment, you can download the TSP booklet Tax Rules about TSP Payments (437kb).
In Conclusion
The TSP is a smart and convenient way for service members and qualified civilian employees to invest in their retirement. It offers decent investment options, low fees, and a generous match of up to 5% for many participants.
While there are some drawbacks, including contribution limits and some payout penalties, overall, this is a viable way to set yourself up for a more secure retirement.
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Brent says
I never really was quite sure what benefit one gets from the TSP. With no matching funds, it seems basically the same as an IRA, but possibly a little harder to get money out of should one need funds for emergencies. A normal IRA allows for a reasonable amount of contribution as well, which can be automatically deducted just the same, and is so easy to withdraw from that one can actually borrow the money without permission about once a year. The investment options of an IRA are almost endless, depending on where you open it. The only advantage I can think of in the TSP is a slight convenience in contributing and re-allocating the funds. It might be slightly better to have money in a TSP than an IRA if you’re worried that someone–such as a court judgement or the IRS is coming after you for garnishment–but both types of accounts are still sufficiently hard to attach for debts, and neither will provide a permanent solution for such a predicament.
Joey says
The TSP is EVIL! Do no put a single cent in it (unless they are providing matching contributions).
The TSP holds your money hostage AND makes you pay them to do so. Imagine your employer has a bank that you use…you put money in and pay them a fee to manage (TSP fees are low – great!). However, as long as you still work for that employer you cannot take any money out of their bank. Not even just the money you put in, even if you have $0 in matching contributions. That is how the TSP works (at least for the uniformed services). You cannot roll your TSP to an IRA and you are not permitted to withdraw the Roth contributions you have made. The law allows both as do most employers 401Ks and any legit financial institution. The only options TSP provides for you to access your money is either a loan or an extreme hardship withdrawal.
So, as long as they employ you, they get to hold your money hostage. Why are their rules so much more restrictive than the law and common-practice for the rest of the country? How are their practices even legal?
Aside from matching contributions, you are better off putting your money anywhere else (including under the mattress). Their rates do not justify their restrictions.
Ryan Guina says
Joey, What works for one investor may not work for another. Telling everyone to stay away does them a disservice and is irresponsible. People should only save for retirement with money they will not need in the near future. That is the difference between retirement investing and short or medium term savings.
Taking in-service distributions is allowable under law, but there are many nuances, and not all employer plans allow this (I have worked for several civilian employers, none of which allowed this; from my understanding, in-service distributions is more the exception than the rule). It’s also advisable that people seek out the advice of a tax professional to ensure they don’t make a costly mistake.
I recommend people who are considering retirement plan distributions read the
(IRS 401(k) Resource Guide – Plan Participants – General Distribution Rules) for more specific information.
If the TSP is not for you, then consider investing in an IRA (which also has early withdrawal penalties), or in a non-retirement investment account, also called a taxable investment account. Using a taxable investment account will give you access to your money at will. However, it’s also important to do more research to better understand the tax implications of buying and selling securities (I recommend learning more about short term and long term capital gains, for instance, and the wash sale rule, if you are more inclined to look for additional tax benefits when selling securities for a loss).
Brent says
As soon as I quit my employment with my regular employer, I moved my funds to a Roth IRA. I haven’t had to pay any fee at all to my brokerage to maintain the funds. Not even a few cents. I thought of another advantage of 401k’s I didn’t mention above; you can remove the money from one at age 55 instead of 60 as with an IRA, as long as you quit the employment at that time. Does TSP allow this? The author does make a good point in that if someone is completely unfamiliar with investing, the TSP plan is a quick, easy way to pass the funds into experienced hands, and saving money for retirement should NEVER be discouraged–even if one can point out other options that are technically correct. I probably qualify unofficially as a professional investor–as I’ve supported myself with stock trades and reserve service for many years now, so I may be a bit arrogant, but it seems like all an inexperienced person needs to do is just open up a brokerage IRA, choose a nice fund, allot auto-deposit, and then forget about your money. Ask your uncle, the banker, which stocks or funds to buy into.