Thrift Savings Plan

Featuring an excellent selection of extremely low-cost investment options, the Thrift Savings Plan (TSP) is the 401(k) that everyone wishes their company offered. It is suitable for meeting the savings, investment, and retirement goals of both lifelong and shorter-term government employees and members of the uniformed services.

In addition to standard Traditional (pre-tax) contributions, the TSP also accepts Roth (post-tax) contributions, which can be extremely beneficial to those in an artificially low tax bracket due to tax-free combat zone or training income. The armed services don’t receive employer matching contributions, but some other types of government employees do. The employer does make an automatic pre-tax contribution of 1% of your base pay, regardless of employee contributions. Employee contributions are deducted directly from the paycheck, and are subject to the annual §402(g) limit of $17,500 for 2013.

The Plan allows loans and hardship withdrawals, and the total value of the plan can be withdrawn starting at age 59 ½. At separation from service, money may be left in the TSP, rolled over into an IRA, withdrawn as a lump sum with a penalty, or rolled into an annuity that generates a constant stream of payments for the rest of your life; in most cases, it is most beneficial to leave the money invested in the TSP until retirement. If a Roth TSP is rolled into a Roth IRA, the total amount of your contributions to the Roth TSP is available for withdrawal at any time and for any reason, tax- and penalty-free.

IN GENERAL, a TSP-eligible employee without matching should make the maximum allowed annual contribution to a Roth IRA — the §219(b)(5)(A) limit of $5,500 in 2013 — before contributing to the TSP.


Federal Employees’ Retirement System (FERS) participants and the uniformed services are eligible for TSP:

Employer Contributions

Your agency automatically contributes 1% of your pre-tax basic pay. This contribution is fully vested after 3 years of service.

"Agency Automatic (1%) Contributions—equal to 1% of your basic pay—are deposited into your FERS employee TSP account every pay period, beginning the first time you’re paid. Agency Automatic (1%) Contributions are not taken out of your pay; your agency gives them to you. You don’t have to contribute any money to your TSP account to receive these contributions, but they are subject to “vesting.” "

Employer Matching
Your agency may also offer you matching contributions. Currently, only the Army is offering matching for new recruits in high-demand specializations. Other government employees may receive matching.

"As another benefit to servicemembers, the Army is testing a program where the service matches soldiers’ contributions to TSP, Johnson said. This program only applies to new enlistees who fill critical specialties. The Army will match 5 percent of the pay the soldier contributes to TSP; the first 3 percent will be matched dollar for dollar, and the next 2 percent matched 50 cents on the dollar, he said."

"Matching Contributions - the secretary responsible for each service may designate critical specialties for matching contributions. Members serving in those specialties who agree to serve on active duty for 6 years may be eligible for matching contributions during the 6-year active duty obligation."

"Currently, members of the uniformed services do not receive matching contributions. However, the secretary of each individual service is allowed by law to designate particular critical specialties as eligible for matching contributions under certain circumstances."

Employee Contributions

TSP contribution rules are essentially identical to those of the corporate 401(k), educational 403(b), or governmental 457(b). Employee contributions are deducted directly from the paycheck, and are subject to the annual §402(g) limit of $17,500 for 2013. You may divide your contributions between Traditional (from before-tax money) and Roth (from after-tax money) contributions; Traditional contributions and their earnings are taxable as income when you withdraw them in retirement, while Roth contributions and earnings are tax-free. Roth contributions are advantageous if you believe you will be paying a higher income tax rate in retirement than you are now; this is especially likely to be true if your current income tax rate is artificially low due to Combat Zone Tax Exclusion or training income.

Withdrawing Money

See the TSP Summary Plan Document and TSP Tax Information Document for full details on withdrawals and their tax implications. Optimally, a fully-provisioned emergency fund and intelligent use of credit will obviate the need to access your TSP funds before you turn 59 ½; the TSP is, after all, a retirement savings account. There are, however, ways to access TSP money before retirement.

→ In retirement
When you reach age 59 ½, you may begin withdrawing your contributions and their earnings from the TSP. You will pay income tax on Traditional contirbutions and their earnings, while Roth contributions and their earnings will be tax-free.

→ Before retirement, while still employed
Legal or medical expenses or a personal casualty loss may qualify you to make an in-service hardship withdrawal. You will pay income tax on Traditional contributions and earnings on both Traditional and Roth contributions withdrawn in this way, and if you are under age 59 ½ you may also be subject to an early withdrawal penalty tax.

You may also take a loan of between $1,000 and $50,000 from the total value of your TSP. There is a $50 processing fee to initiate a loan, and you must pay the loan back with interest (to yourself). If you take a loan from your TSP, the money you take out does not have the opportunity to increase in value due to dividends and stock market appreciation. The interest rate you pay (to yourself) is the interest rate at the time you take the loan on the TSP’s G Fund, which contains short-term US Treasury securities. General-use loans must be paid back within 5 years, while loans for the purchase or construction of a primary residency must be paid back in 15 years. Loans that are not paid back will be counted as withdrawals and will be subject to income taxes and early withdrawal penalties.

 → Before retirement, after separating employment
Any time after leaving employment, you may take a full or partial withdrawal of the money in your TSP account. Full withdrawals may be completed as a cash lump sum, as a series of monthly payments, or in the form of a life annuity that will pay you at a set rate until you die. You will pay income tax on Traditional contributions and earnings on both Traditional and Roth contributions withdrawn in this way, and if you are under age 59 ½ you may also be subject to an early withdrawal penalty tax.

You may also roll the money over into an IRA, as described below.

Rollover Options
Not planning to continue military service until retirement? The Roth TSP is still a great option.

After separating employment, you have two excellent options:
  1. leave your TSP funds where they are, so that they continue to grow in the ultra-low-cost TSP investment options until you withdraw them in retirement; or 
  2. roll your Roth TSP over into a Roth IRA. This is tax- and penalty-free, and following rollover, your total Roth TSP contribution amount is available for withdrawal at any time and for any reason, tax- and penalty-free. 
If you are using your retirement plan as a backup emergency fund, the Roth IRA is more liquid and less restrictive than the Roth TSP and therefore the better choice.  If you are planning to retire early, a rollover to the Roth IRA will also make the TSP principal available for tax- and penalty-free withdrawal to help cover expenses until the TSP investment earnings become available at age 59.5 and Social Security kicks in at 62-70.

Investment Options
The TSP offers five different kinds of funds: G, F, C, S, and I.  There are also L Funds, which are ‘target date’ funds that invest in the above funds in different proportions.

See all the details in the TSP Fund Information Document.

All of these funds share an extremely low all-in net annual fee (expense ratio) of 0.025%. You cannot find a rate that low anywhere else.

 • G Fund - Government Securities
 • F Fund - Bond Index
 • C Fund - Stock Index, S&P 500
 • S Fund - Stock Index, Extended Market
 • I Fund - Stock Index, Developed International

If the TSP is your only retirement savings account and you don’t want to spend a lot of time mulling over your asset allocation, simply choose the L Fund that corresponds to your expected retirement horizon.

If the TSP is only one of several accounts, especially if you also have an IRA and a taxable brokerage account and you want to maximize the effects of a Tax-Efficient Asset Placement strategy, you will probably allocate among some combination of the G, F, C, S, and I Funds. Consider tax efficiency first, then consider expense ratios.

If you have questions about your particular investment scenario, contact me.

Account Consolidation

If you have money in a Traditional IRA or a Traditional or Roth employer-sponsored retirement plan such as a 401(k), 403(b), or 457(b), you have the option of consolidating those accounts into the TSP. This could be advantageous to simply account management and take advantage of the TSP’s extremely low expenses.

See the TSP Summary Plan Document section, “Moving Money From Other Plans into the TSP” for details.