Thrift Savings Plan (TSP): How It Works & Exit Strategies
What is a Thrift Savings Plan (TSP)?
The Thrift Savings Plan (TSP) is a retirement savings and investment plan designed specifically for federal employees and members of the uniformed services, including the military. Established in 1986 as part of the Federal Employees’ Retirement System Act (FERSA), the TSP is a tax-advantaged plan that allows participants to grow their retirement savings through contributions, government matching (for eligible participants), and investment options.
TSP functions similarly to a 401(k) plan but is exclusively for federal employees and military personnel. It offers low-cost investment options, making it an efficient and affordable way for government employees to build their retirement nest egg.
How Does the TSP Work?
The Thrift Savings Plan operates through contributions, government matching, tax advantages, and investment options. Here’s how:
1. Employee Contributions
Federal employees and uniformed service members can contribute a portion of their salary to their TSP account. In 2025, the maximum contribution limit is $23,000, with an additional $7,500 catch-up contribution allowed for participants aged 50 and older.
2. Government Matching (For Federal Employees Under FERS)
One of the major benefits of the TSP for Federal Employees Retirement System (FERS) participants is employer matching. The government automatically contributes 1% of an employee’s basic pay, regardless of personal contributions. Additionally, employees who contribute to their TSP receive matching contributions up to 5% of their salary:
- First 3% of salary = Dollar-for-dollar match
- Next 2% of salary = 50 cents per dollar match
This means an employee contributing at least 5% of their salary effectively doubles their savings through employer contributions.
3. Tax Advantages: Traditional vs. Roth TSP
TSP participants can choose between Traditional TSP and Roth TSP contributions, each offering distinct tax advantages:
- Traditional TSP: Contributions are pre-tax, reducing taxable income. However, withdrawals in retirement are taxed as ordinary income.
- Roth TSP: Contributions are after-tax, meaning no immediate tax benefits. However, qualified withdrawals in retirement (after age 59½ and five years of participation) are tax-free.
Participants can split their contributions between both options to balance current and future tax benefits.
4. Investment Options
The TSP offers five core investment funds and Lifecycle (L) Funds:
- G Fund (Government Securities Fund) – Low-risk, U.S. Treasury securities
- F Fund (Fixed Income Index Fund) – Bonds, similar to a corporate bond fund
- C Fund (Common Stock Index Fund) – Tracks the S&P 500
- S Fund (Small Capitalization Stock Index Fund) – Focuses on small and mid-sized companies
- I Fund (International Stock Index Fund) – Invests in international stocks
For hands-off investors, Lifecycle Funds (L Funds) offer automatic diversification and risk management by adjusting asset allocation based on a target retirement date.
How Does TSP Compare to Other Retirement Plans?
While TSP shares similarities with 401(k) plans, IRAs, and pensions, key differences set it apart:
1. TSP vs. 401(k)
| Feature | TSP | 401(k) |
|---|---|---|
| Eligibility | Federal employees, military personnel | Private sector employees |
| Employer Matching | Up to 5% (FERS employees) | Varies by employer |
| Investment Options | Limited, low-cost index funds | Broader selection of mutual funds & ETFs |
| Fees | Ultra-low (0.06% average expense ratio) | Higher fees depending on plan provider |
| Loan Options | Yes, for general purpose or home purchase | No |
- TSP is best for low fees and government-backed stability.
- 401(k) plans provide greater flexibility in investment choices.
2. TSP vs. IRA
| Feature | TSP | IRA |
|---|---|---|
| Contribution Limit (2025) | $23,000 ($30,500 with catch-up) | $7,000 ($8,000 with catch-up) |
| Investment Options | Limited, low-cost index funds | Wide range of stocks, bonds, mutual funds, ETFs |
| Employer Contributions | Yes, For FERS | No |
| Tax Options | Traditional & Roth | Traditional & Roth |
- TSP is ideal for higher contribution limits and employer matching.
- IRAs offer greater investment flexibility.
3. TSP vs. Pension
| Feature | TSP | Pension |
|---|---|---|
| Structure | Defined contribution (self-funded) | Defined benefit (employer-funded) |
| Risk | Market-based returns | Guaranteed lifetime income |
| Flexibility | High | Low |
- TSP provides flexibility and control over retirement savings.
- Pensions guarantee a lifetime income but are becoming less common.
Best TSP Exit Strategies for Retirement
Properly managing TSP withdrawals in retirement is critical for maximizing income and minimizing taxes. Here are some optimal exit strategies:
1. Systematic Withdrawals
- Retirees can choose monthly, quarterly, or annual withdrawals.
- Withdrawals are taxed based on Traditional or Roth contributions.
- This method provides flexibility but requires careful budgeting.
2. Life Annuities
- TSP participants can convert their savings into a lifetime annuity for guaranteed monthly income.
- However, once annuitized, funds are locked in and cannot be withdrawn in lump sums.
3. Required Minimum Distributions (RMDs)
- At age 73, TSP account holders must begin taking RMDs from their Traditional TSP.
- Roth TSP funds can be rolled into a Roth IRA to avoid RMDs.
4. Rolling Over TSP to an IRA
- Many retirees roll their TSP into an IRA to access broader investment options and flexible withdrawal rules.
- Rolling over funds allows for continued tax-deferred growth.
5. Partial Withdrawals
- Retirees can take one-time withdrawals while keeping the rest of their funds invested.
- Useful for managing unexpected expenses.
Final Thoughts: Is TSP the Best Option for Federal Employees?
The Thrift Savings Plan (TSP) is one of the most cost-effective and efficient retirement savings plans available. With its low fees, government matching contributions, tax advantages, and diversified investment options, it remains a powerful tool for federal employees and military personnel.
For those retiring, the best strategy depends on individual goals, tax considerations, and income needs. Rolling over funds, using systematic withdrawals, or choosing an annuity can help optimize retirement income.
By understanding how TSP works and planning ahead, federal employees can ensure a secure and comfortable retirement.
Looking for Guidance?
If you’re seeking personalized advice, consider reaching out to a financial professional. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 or contact us here to schedule an appointment with an independent trusted and licensed financial professional.
🧑💼Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities.
Disclaimer
This article is for informational purposes only and should not be considered financial, tax, or investment advice. The Thrift Savings Plan (TSP) is a government-sponsored retirement savings program, and individuals should consult with a qualified financial advisor, tax professional, or TSP representative before making any decisions regarding contributions, withdrawals, rollovers, or investment allocations. Investment performance is not guaranteed, and past performance does not predict future results. SafeMoney.com is not affiliated with the Thrift Savings Plan, the U.S. government, or any federal agency.
