Understanding the Thrift Savings Plan (TSP)


Your Thrift Savings Plan (TSP) is a unique retirement account for all service members and, just like most things in life, there are many ways to work it. To take full advantage of the savings options and tax benefits available to you, you must first get a firm understanding of how the system works.

There is actually no need to set up your TSP – it is automatically created for you upon enlisting or commissioning into the military. In fact, the government immediately starts contributing the equivalent of 1% of your basic pay, which is completely free money to you even if you elect not to contribute. However, they default to taking 3% of your salary and contributing it to the TSP. The government will match 100% of the first 3% that you contribute and 50% of the next 2%, so it is in your best interest to contribute at least 5%. The numbers equate to a 4% match, which beats the average company 401(K) match of 3.5%. To increase contributions, you only need to sign into myPay and follow the instructions.

You can contribute up to $20,500 per year to your TSP (or $27,000 if you are age 50 or older).

There are two forms of the TSP – Traditional and Roth.

The Traditional TSP is a tax-deferred plan, meaning you put untaxed money in and only pay taxes on your retirement withdrawals (including on the capital gains!). Funds put into a traditional IRA don’t count as income for that year, potentially bumping you down a tax bracket. On the flip side, your retirement withdrawals DO count as income, so you will end up paying taxes on not only what you put in but all of the money that has accumulated, and you may be bumped up a tax bracket in your golden years.

The Roth TSP works in the opposite way – you pay taxes on the funds when depositing them into your retirement account, then let those funds grow tax-free. When you start pulling from your Roth account in retirement, you pay zero taxes, plus the principal doesn’t count as income since it has already been taxed. This is the huge advantage of a Roth TSP – all the money that has grown over the years is completely shielded from taxation.

It should be noted that any government matches are put only into the traditional side of the TSP, but once you have retired from the military, you’ll have the option to rollover these funds to an Individual Retirement Account and convert to a Roth IRA.

Both plans require you to turn 59.5 before you start withdrawing funds. You can withdraw earlier, but you’ll end up paying a 10% penalty (and in the case of the Roth, you’ll be taxed on any amount you withdraw in excess of what you have contributed). Conversely, you can allow these funds to continue working for you, untouched, until the age of 72 when you must begin receiving what’s called a Required Minimum Distribution (RMD).

Risk Number

Before you start actively managing your TSP funds, you need to figure out your risk number and overall objectives. When you’re younger, it may make sense to pursue riskier yet potentially more profitable strategies, and as you age reshuffle your portfolio into more conservative and stable investments. Keep in mind that at any time there can be a market downturn, and the closer to retirement you are, the bigger those downturns will hit, especially if you’ve been pursuing an aggressive strategy with greater exposure to market volatility. These downswings may even push back your retirement until markets recover. A financial planner can help you untangle your preferences and explain in detail the risks and rewards of each financial strategy, but it’s ultimately up to you to decide how much risk you’re willing to take on.

5 Core Index Funds (+ L Funds)

The money you put into your TSP doesn’t just sit in a savings account collecting interest – it is actively invested into 1 of 5 funds (plus the L funds) created by the government for the sole purpose of serving the TSP. Here is a brief breakdown of each:

The G Fund (Government Securities Investment Fund)

The G Fund is the only TSP fund that does not invest in an index. Rather, it invests in specially-issued Treasury securities offered only to government employees and members of the armed forces. The G Fund is the only TSP Core fund that GUARANTEES a positive return on investment. Accordingly, the RoR is the lowest of all the available funds. These are suitable for the most cautious of investors as there is no risk involved.

The F Fund (Fixed-Income Investment Index Fund)

The F Fund invests in corporate and foreign bonds, government securities, and mortgage-backed securities. It generally offers a higher RoR than the G Fund but it isn’t guaranteed, though it’s widely accepted as a safe means of investing. The F Fund has a civilian equivalent in the form of the Barclays iShares Core Total U.S. Bond Market ETF.

The C Fund (Common Stock Index Investment Fund)

Here we finally see a fund that primarily invests in stocks, with all of the risks and potential returns that entails, though it is still the most conservative of the three funds which invest in stocks. It correlates with the S&P 500, which invests in large and medium-sized companies. It is generally more profitable than the F or G funds, showing great historical returns, though with commensurate volatility.

The S Fund (Small-Capitalization Stock Index Fund)

The S Fund invests in the securities which comprise the Dow Jones. These companies are smaller though have much greater room for growth. This means there is potential for very high returns albeit with higher risks than any of the aforementioned funds.

The I Fund (International Stock Index Investment Fund)

The I Fund is the only fund that invests on an international scale. It invests in the same companies as the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. It is considered to be riskier than the C fund but historically outpaces it performance-wise. The companies are larger and more established than those found in the S fund.

The L Funds (Lifecycle Funds)

Finally, we get to the L funds. These funds behave as Target-Date funds, which means that the fund initially actively invests in riskier vehicles such as stocks but gradually moves to more conservative investments, such as bonds, over time. The L Funds spread out retirement monies between the three stock market funds and the two bond funds for maximum exposure to all potential markets.

Big News!

As of 6/1/2022, TSP enrollees will be able to invest in some 5000 mutual funds of their choice. This will allow greater investment flexibility for those who would like to expand beyond the TSP Core funds and take a more active approach to investing.

Final Thoughts

The TSP is a great retirement savings vehicle that is available to you as a member of our armed forces. Unlike the average 401(k), and in addition to the other substantial benefits you receive, the US Government will match up to 5% of your contributions. By determining your risk number and investment goals, and understanding your investment options, you can maximize the effectiveness of your contributions and realize those goals that matter most to you.

Mission Critical FPI is an expert on the TSP and the entire government benefits system and can help you navigate this territory with ease. Give us a call today. In the meantime, check out our TSP Guide!

About the Author

  • Jeff Geraci

    Jeff Geraci grew up all over the world in a military family, and spent 5 years on active duty. While serving, he felt the tug between planning for financial independence with a limited income, and an all-consuming job. That’s when he decided that with a financial plan and a mentor, a service member could be successful in his career and finances! Military members are decisive, family-oriented, and really too busy to keep up with the changing financial world: the psychographics matched, people with military experience were an ideal community to serve!

Jeff Geraci

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