Thrift Savings Plan Overview

Thrift Savings Plan (Stock Photo)

The Thrift Savings Plan (TSP) is a federal government-sponsored retirement savings and investment plan. The purpose of the TSP is to provide retirement income.

The TSP is a defined contribution plan. The retirement income that you get from your TSP account will depend on how much you have contributed to your account during your working years and the earnings on those contributions.

The Thrift Savings Plan is similar to plans that many private corporations offer their employees under so-called "401(k)" plans.

Thrift Savings Plan: Your Investment Mix

Your investment mix is the most important factor affecting the performance of your TSP account. You have five TSP funds that you can invest in and five more funds known as "Lifecycle" funds that invest in the main five funds based on your retirement plans.

The five main funds are:

  • The G Fund - This fund invests in government securities and is the safest fund. You won't lose money investing in this fund, but your rate of return is the lowest.
  • The F Fund - This fund invests in U.S. Government, mortgage-backed, corporate, and foreign government bonds. Your risk is fairly low, but your rate of return is too. Usually when stock markets go down - bonds go up in value. 
  • The C Fund - This fund invests in the stock market. The stocks are made up of the Standard and Poor's 500 (S&P 500) Index, a mix of stocks of 500 large to medium-sized U.S. companies. If the stock market goes up you can make money - if it goes down you can lose money. The risk is still higher than the F fund, but the rate of return is higher too.
  • The S Fund - This fund invests in the stock market too, but this time instead of big companies it invests in smaller companies that aren't in the S&P 500. The risk is still higher than the C fund, but the rate of return is higher too.
  • The I Fund - This fund invests in international stock markets. This is the riskiest fund, but you may also make the best rate of return from it too. 

Lifecycle Funds

If you're not a gambler or a stock market whiz you may want to invest in the Lifecycle Funds. These funds are run by the Thrift Savings Plan people and automatically invest in all of the above funds based on what the experts think is the best strategy for you based on your age and prospective retirement status. 

For example, if you are young most experts say you can take chances with investing. You can make a lot of money in the riskier investments and if they tank out you still have enough time to make back the money you lose. However, if you are older (or closer to retirement) you don't want to bet everything on a risky investment because if you lose money you will most likely be unable to make up any loss before retirement. 

The nice folks at TSP have several Lifecycle Funds for you:

  • L2020 - If you're planning on retiring in 2020
  • L2030 - Same, but for 2030
  • L2040 - Likewise but 2040
  • L2050 - Yep, 2050

These funds rebalance their investments every three months to keep in line with the plan of being a more aggressive investor if you are young and a safer one if you are older. 

There is one more fund, the L Income, for when you are retired and taking money out of the TSP. This fund's objective is to achieve a low level of growth with a high emphasis on keeping your money safe.

Thrift Savings Plan Contribution Limits

You can contribute any percentage (1 to 100) of your basic pay. However, your annual dollar total can't exceed the IRS limit. This limit changes each year. For 2019 it is $19,000, but if you are over 50 you can throw in another $6,000.

Depending on which retirement plan you are under, the military may match your contributions up to 5 percent of your basic pay. 

Thrift Savings Plan Benefits

Your TSP contributions may be tax-deferred. That means you don't pay taxes on the money until you take it out. So if you contribute $5,000 to the TSP now that $5,000 will be taken off the top of the income reported to the IRS and won't show up on your W-2.

However, you can choose a Roth TSP. This mean you pay the taxes on it now and when you withdraw the money it is all (contributions plus interest) tax-free. 

Which plan is better? That depends on your situation, most experts say that the Roth is a better option for most people though. 

You can also transfer any amount of money from the TSP to other qualified retirement plans when you get out of the military.

There is a lot to consider when making any financial investment. To get important details on the Thrift Savings Plan, visit the official TSP Website.

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Thrift Savings Plan - TSP