TSP 101

May 11

Whether you’re shipping out for boot camp in a few weeks or you’re an NCO just catching up on your finances, you may be asking yourself: “What’s a TSP? How do I use it to invest my money? What’s a match?” If you’ve asked yourself these questions or others regarding the TSP, we’re going to break everything down so you can know where you stand and how to proceed with creating your ideal financial future.

What Is It?

The TSP, or Thrift Savings Plan, allows members of the military and other federal employees to take advantage of tax breaks while saving money for retirement, much like a 401(k) plan offered by private employers. So, depending on how you put your money into the TSP, you get to keep more of your money now or when you retire, instead of returning it to the government in the form of taxes. Additionally, depending on what retirement plan you are enrolled in, the government will contribute to your account as a part of your compensation package, allowing you to save even more for retirement than you would be able to on your own.

Contributions

Like many 401(k) plans, the TSP offers both Traditional and Roth contribution options. The Traditional method allows you to contribute money from your paycheck before taxes are taken out, also known as “pre-tax” money. This means that because there is less money in your paycheck to be taxed on after taking out your contribution, you will pay less taxes when you contribute to the TSP. On the other hand, Roth TSP contributions are made with money from your paycheck after taxes have been taken out, but before your paycheck hits your bank account. Since Roth contributions are taxed before they are contributed, all growth and withdrawals are tax-free, provided you withdraw the funds after the age of 59 and 1/2 years old, and they have been in the account for at least 5 years. Both types of TSP contributions go straight to your TSP account, and never pass through your personal bank account, meaning you don’t have the opportunity to spend it in the moment. This can be a psychological benefit that helps some people save for retirement, allowing them to pretend that the money they contribute does not exist, so they can leave it out of their budget entirely. One helpful tip for TSP contributions is that they are controlled from MyPay, not the TSP, so if you are looking to adjust your contribution levels, go to MyPay first.

Matching Funds

Agency match is a benefit available to many military members and government civilians, depending on your retirement plan. If you are enrolled in the Blended Retirement System (BRS) (or FERS for federal government civilians), TSP matching contributions are part of your compensation package. Basically, the government will match whatever contributions you make to your TSP, up to 5% of your base pay. Let’s look at an example. If you’re an E4 in 2023 with 2 years time in service, this means that if you contribute at least 5% of your base pay, the government will contribute $131.60 in matching funds each month to your account. Matching contributions will always be made with Traditional (pre-tax) money. What does all this mean for you? Making contributions to your TSP allows you to receive extra money each month from the government. Even though you can’t spend it immediately in most cases, you’ll be glad you saved and invested this money when you reach retirement age and your contributions (from yourself and Uncle Sam) have grown and compounded over the course of your life and are now worth much more than when you first contributed.

Investment Choices

This brings us to the final topic: how do you invest your money once it’s in your TSP? One of the benefits of the TSP over other retirement accounts is the fact that expenses and fees charged to participants are incredibly low. So you get to keep more of your money and let it continue to grow for retirement. Also, your investment options in the TSP are relatively simple. There are two basic categories: individual funds and lifecycle funds. Individual funds offer more freedom of choice for TSP investors who are interested in managing their own mix of investments. Users can choose a mix of the following individual funds:

G Fund: This fund is composed entirely of short-term U.S. government securities issued specifically to the TSP. It is extremely low-risk, as the U.S. government has never failed to pay its obligations. However, this also means that it has very little growth potential, so it’s best for investors who don’t like risk and are interested in preserving their money.

F Fund: This fund is invested in high quality U.S. bonds, both government and corporate, and tracks the Bloomberg U.S. Aggregate Bond Index. This fund has slightly more risk than the G Fund, but also more growth potential.

C Fund: This fund tracks the performance of the S&P 500, which is composed of the stocks of the 500 largest publicly traded U.S. companies. The C Fund has more risk, as recessions and other economic factors do affect the performance of its shares. However, over the long term, funds like the C Fund have shown some of the best steady growth potential for investors.

S Fund: This fund tracks the performance of the Dow Jones U.S. Completion Total Stock Market Index, which is composed of small-to-medium sized publicly traded companies not included in the S&P 500. Since the companies included are smaller, there is more risk, as smaller companies are less established and have a higher chance of failing. However, there is also a higher growth potential, because small companies are able to grow more quickly depending on certain factors.

I Fund: This fund gives TSP investors the opportunity to get in on the international action, tracking the Morgan Stanley Capital International Europe, Australasia, and Far East Index. This means TSP users have the opportunity to invest in most major developed international regions with their TSP funds, including some markets and customer bases not always captured by U.S. companies.

The other investment option for TSP users is the Lifecycle Fund family. There are 10 Lifecycle Funds that exist in five year increments (L2025, L2030, etc.). These funds contain a diversified mix of the individual funds (G,F,C,S,I). Each quarter, this mix of funds is adjusted to reflect an appropriate mix of risk tolerance and growth potential for that time in the fund’s lifespan. Newer funds have a riskier mix to expose investors to more growth potential, while funds that are closer to being cashed out when their investors retire are more likely to contain a mix of assets designed to keep accounts close to their current levels, with less risk of significant loss. Lifecycle Funds are usually the better choice for TSP users who are less savvy on investing. Users are able to park their contributions in the Lifecycle fund closest to their projected retirement year, then sit back and allow the financial professionals at the TSP to make the decisions on the appropriate investment mix. Whichever option you choose, it is worthwhile to examine your TSP at least once a year, to ensure your contributions and investment choices are consistent with your goals for the future.

The TSP also offers the opportunity to invest in mutual funds through a mutual fund “window,” but we will discuss this topic in a different blog post, as it is outside of the defined “TSP Universe”.

The default investment that your money automatically goes into unless you change it will be either the G Fund or the Lifecycle Fund most appropriate for your projected retirement year. Regardless of what you decide to invest in, it is prudent to consider your investment decisions at least once a year to ensure you are invested in assets that meet your goals for the future.

Final Thoughts

While the Thrift Savings Plan can be daunting for those who are unsure about retirement, personal finance, and investing, hopefully, this discussion has been informative and helpful as you make decisions moving forward in your career. Your TSP can be one of your biggest wealth building tools, and I strongly believe you should take advantage of it if at all possible! Please leave a comment with what you felt was the most helpful in this post, as well as other topics you’d like to see covered in future posts!