Thrift Savings Plan (TSP): Your Comprehensive Retirement Guide

The Thrift Savings Plan, or TSP, is a tax deferred employer sponsored retirement plan for certain civil service employees and US military members. If has very similar rules as a 401k plan or 403b plan, including the same contribution limits, withdrawal rules, rollover rules, and more.

Benefits of Investing in the Thrift Savings Plan

In general, most civil service and military service members are eligible to invest in the TSP. Enrollment is now automatic for most members, otherwise, it’s as simple as taking five minutes to sign up through your HR department or by visiting the TSP website. Most civil service members receive an automatic matching contribution, and there is nothing members need to do to start the initial match, though they will need to make their own contributions to max out the agency match. Here are some additional benefits to investing in the TSP:

Solid investment choices

The Thrift Savings Plan is comprised of five basic index funds and a handful of LifeCycle Funds (target date retirement funds), which make it easy for even the beginner investor. Their index funds mirror popular stock indexes and bond funds.

The stocks indexes cover some of the fundamental sectors of the market, including Large Cap stocks (mirrors the S&P 500 index), Small Cap stocks, (reflects the Dow Jones Wilshire 4500 index), and International Stocks (Morgan Stanley International EAFE Stock Index). The bonds cover government bonds (generally the most stable), and fixed securities, which aren’t guaranteed like government bonds, but which often have a greater return on investment.

The TSP also uses target date funds for those who want to invest with a less hands on approach. The target date funds, called LifeCycle Funds, are comprised of a mixture of the above stocks and bonds and are automatically allocated by your target retirement date, adding more fixed income investments to the mix the closer you get to retirement.

Very low expense ratios

The Thrift Savings Plan has some of the lowest expense ratios I’ve ever seen for any form of index fund – often even lower than companies such as Vanguard and Fidelity. The highest management fee is currently .05%, which includes the LifeCycle Fund investments (most mutual fund houses charge much more than this for a target date fund investment).

Tax free withdrawals are possible in retirement

Yes, it’s true! The TSP recently added a Roth TSP option, but it was even possible to receive tax free withdrawals before the Roth option was available. Military service members who contribute to the TSP while deployed are able to make contributions with tax exempt income. Since Traditional TSP contributions are made with pre-tax money, the TSP tracks these tax-exempt contributions and members can with draw them on a prorated basis with their regular TSP withdrawals. It’s important to note that only the contribution is eligible to be withdrawn tax free, as it isn’t possible to track the earnings from that contribution. Tax exempt contributions are tracked on your TSP balance sheet – look for a line which states “Tax Exempt Balance – $xx,xxx.xx.” You can learn more about tax-exempt TSP contributions and withdrawals at our sister site, TheMilitaryWallet.com.

Invest your bonuses and special pay

Military members have the option to invest all or a portion of their bonuses and special duty pay to their TSP, up to the annual contribution limit. Eligible pay and bonuses include things such as your special duty pay, retention bonuses, Hostile Fire Pay, hazardous Duty Pay, and some other bonuses.

Civil service members are eligible for matching contributions

Civil service members automatically receive a contribution to the TSP when they join the civil service, but they can also earn more money by making larger contributions, which the civil service will match – up to 5% of their salary (up to the contribution limits).

Prior to 2018, the military did not offer a matching contribution for military members, with very limited exceptions (a trial basis used as a retention tool; this was not widely available). The military services are allowed to offer a match, but it would have to come out of personnel funds, which are limited.

The military launched the Blended Retirement System (BRS) in 2018. The BRS offers a reduced pension in return for matching TSP contributions. All members who join the military after Jan 1, 2018 are automatically enrolled in the BRS. Current military members with less than 12 years of active duty service (or an equivalent number of points if serving in the Guard or Reserves) are eligible to opt into the BRS.

The Thrift Savings Plan is a solid investment plan for civil service members and military members, and is a great way to invest in a low cost, tax deferred retirement plan.

For reasons I believe the TSP has some drawbacks read this article: TSP – 5 Drawbacks.

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