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A Deep Dive Into the Thrift Savings Plan for Military Service Members and Government Employees

Do you have access to the Thrift Savings Plan? If so, make sure you take advantage of it! The Thrift Savings Plan (TSP) is the U.S. government’s version of a 401(k) qualified retirement savings plan for military service members and civilian federal government employees. The TSP is a powerful retirement savings tool that provides both low-cost and tax-efficient investment options.

As a TSP participant, you can contribute income into one of two retirement accounts:

  • A Traditional TSP retirement account to defer paying taxes until they receive distributions in retirement
  • A Roth TSP account for those who prefer to contribute after-tax dollars and let their balance grow tax-exempt

Contributions made by military service members while serving in tax-free combat zones are taxed neither in the current year nor in retirement. Total contributions across all accounts are limited to the IRS 401(k) contribution limits ($22,500, plus $7,500 in catch-up contributions for people over age 50 in 2023).

With the TSP, you can invest your money in funds with lower fees than many equivalent civilian 401(k) options. Below is a summary of the TSP investment options:

  • The G Fund is made up of government securities and is guaranteed not to lose value.
  • The F Fund invests in fixed-income investments.
  • The C Fund invests in large stocks and mirrors the performance of the S&P 500 Index.
  • The S Fund invests in small-cap stocks and matches the performance of the Dow Jones US Completion Total Stock Market Index.
  • The I Fund provides exposure to the international stock market, matching the performance of the MSCI EAFE (Europe, Australasia, Far East) Index.
  • The L Income fund is designed to support participants in retirement.

For those looking for professional asset allocation management, TSP has Lifecycle Funds in 5-year increments from L 2025 to L 2065 based on when participants expect to start withdrawals from their account. In the summer of 2022, the TSP added another investment option, opening a mutual fund window that allows participants to move a minimum of $10,000 and up to 25% of their TSP balance into a special brokerage account from which they can invest in a wider variety of approximately 5,000 mutual funds. This option, however, comes with annual administrative, maintenance and trading fees, in addition to the mutual fund expense ratios.

If you are a Federal Employees’ Retirement System (FERS) or Blended Retirement System (BRS) member who began federal service after August 1, 2010, you were automatically enrolled in TSP with 3% of your base pay deferred to a traditional TSP account. Those who joined after October 1, 2020, were automatically enrolled with contributions of 5% of base pay each pay period. You can adjust your savings preferences by logging on to your account online.

In addition to employee discretionary contributions, FERS and BRS employees receive employer contributions. An automatic contribution of 1% of base pay each pay period comes from the U.S. government regardless of how much an employee contributes. This amount and its earnings are subject to vesting. For employee contributions up to 3% of base pay, the government matches dollar for dollar. From 3% to 5%, the match is 50%. To take advantage of the full available matches, you should contribute a minimum of 5% of your base salary pay each pay period.

If you’re a current federal government employee or service member, you can take a general purpose, primary residence or financial hardship loan from the balance of your own TSP contributions. You will then pay yourself back over a limited period via payroll deductions at an interest rate equal to the G Fund’s interest rate at the time of loan inception. You should keep in mind how the reduction in your TSP balance will affect long-term portfolio growth — the less money in your account, the less opportunity you have for compound interest to grow your bottom line.

Upon leaving federal service, TSP participants can choose to keep their money in the TSP for retirement, withdraw some or all of it, set up installment distributions or purchase an annuity through the TSP. Additionally, if you maintain your TSP, you can roll other eligible retirement plans into the TSP to consolidate accounts and take advantage of the low fees. The TSP account structure delivers flexibility in drawdown based on the unique needs of military service members and civilian government employees.

You have worked hard in government service; now make sure your retirement accounts work hard for you. For assistance in evaluating the retirement savings options available to you, look for a CFP® professional who has experience serving clients like you. Find a CFP® professional to work with today.

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