Takeaways
- Thrift Savings Plans are for federal employees and uniformed service personnel.
- TSPs are defined contribution plans that help employees save for retirement.
- TSPs are like 401(k) plans where participants can earn matching contributions.
- TSPs offer a limited buffet of investment options in curated investment funds.
- TSPs participants can choose between a Traditional or Roth style, which affects taxes.
Saving for retirement can get lost in the busy shuffle of life, especially if you are a busy civilian and uniformed service member. That is where the Thrift Savings Plan (TSP) comes into play, which helps millions of current and former federal employees manage their retirement savings. With over $845 billion in assets under management, the TSP is one of the largest managed retirement programs.[1]
The TSP is a type of retirement savings and investment plan designed specifically for federal employees and members of the armed services. The Thrift Saving Plan was initially created and established in the Federal Employees Retirement System Act of 1986 as a foundational component of federal employees’ retirement benefits.[2] A TSP offers similar savings and tax benefits as many private sector employees receive from their 401(k) plans.
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The core purpose of a TSP is to give federal employees the chance to save for retirement in a tax-advantaged way. Participants in the TSP can choose between traditional TSP contributions (made from pre-tax income) or Roth-style TSP contributions (made from post-taxed income) from their paychecks.
The Federal Retirement Thrift Investment Board, which is an independent investment agency, administers the TSP.[3] One of the most notable benefits of a TSP is the low administration cost. Low administration fees help you keep more of your hard-earned retirement savings and allow you to boost savings. The plan is also incredibly straightforward and offers a wide range of investments.
Whether you are a federal civilian employee, a member of the military, or a beneficiary of TSP benefits, it offers an easy, structured way to save and invest for your future.
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How Thrift Savings Plans Work
In many ways, TSPs operate like other defined contribution retirement plans (e.g., 401(k) plans, 403(b) plans), where the amount you contribute plus the capital appreciation from your contributions are the ultimate source of account value.
As a participant, you will decide how much of your paycheck you want to contribute to your TSP within the predefined contribution limits (more on that below). You make these contributions from pre-tax income, the traditional TSP, or after-tax income for a Roth TSP. The biggest difference between traditional and Roth TSP is how your withdrawals from the plan are taxed. With Traditional Thrift Savings Plans, your withdrawals are taxed as ordinary incomes. Roth TSP withdrawals, however, are not taxed.
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If you are in the Federal Employees Retirement System (FERS), the government provides matching contributions up to a certain percentage of your income. These matching contributions include an automatic 1% contribution, regardless of your contributions, and matching on the first 5% you contribute to your TSP. It is important to note that the agency or service will match your contributions up to 5% of the income you contribute. However, the first 3% is matched dollar for dollar, and the next 2% is matched 50 cents on the dollar. As a result, your matching contributions will max at 4% of your income.[4]
You can invest in a spectrum of asset classes with a TSP - government securities, fixed-income investments, and stock index funds. Leveraging these options can help you tailor your investment strategy to your long-term financial goals and personal risk tolerance. However, you are limited to investing a certain number of funds, as described later.
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For investors who prefer a more hands-off approach, TSPs also offer what is known as “Lifecycle funds.” These funds have diversified investments across multiple asset classes and automatically scale risk to become more conservative as you approach your retirement target. These Lifecycle funds operate very similar to target-date funds available in 401(k) accounts.
Retirement funds in your thrift savings plan are yours to keep and can act as a source of money if needed. For example, just like 401(k) loans, you can take a loan from your contributions. TSP loans are subject to specific terms and conditions. Also, there are options for in-service withdrawals to cover specific financial needs. Once you leave federal service, you can choose how to access your funds, including lump-sum, annuity, and monthly payments.
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What Can a TSP Invest In?
TSP participants can invest in many asset classes, each with unique risks and advantages. However, TSP investments are typically limited to investing in the following funds:[5]
- Government Securities Investment (G) Fund
- Fixed Income Index Investment (F) Fund
- Common Stock Index Investment (C) Fund
- Small Capitalization Stock Index (S) Fund
- International Stock Index Investment (I) Fund
- Lifecycle (L) Funds
While these options offer some versatility, risk management, and customization for participants, the limited set of investment funds can be seen as relatively limiting to many investors.
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Contribution Limits for 2025
Each year the Internal Revenue Service sets the TSP contribution limits. These limits are typically updated annually in line with cost-of-living changes, and understanding the limits for your plan can help you save more effectively.
Read More: 2024-2025 Federal Tax Rates and Tax Brackets
The annual maximum contribution from your income to your TSP account in 2025 is $23,500, an increase of $500 over 2024. Additionally, for those aged 50 or older, catch-up contributions of up to $7,500 are allowed in 2025. Finally, the maximum total annual contributions, which are contributions from all sources, including government matching, is $70,000.[6]
Advantages of a Thrift Savings Plan
Saving for retirement can sometimes feel like saving for a different person. Opting for deferrals from your income now is a smart money move because it increases your net worth and allocates money to help grow your retirement nest egg. Here are five advantages to starting and contributing to your TSP:
- Low Costs: One of the biggest draws to a TSP is the low administration fee costs. The fees typically associated with TSP account management are among the smallest in retirement savings accounts.
- Agency Matching Contributions: If you are a FERS participant, the government will automatically contribute up to 4% of your salary. Matching contributions are free money you can invest and spur retirement savings growth.
- Tax Benefits: Whether you choose the traditional or the Roth TSP, your contributions come with substantial tax advantages. The traditional TSP minimizes your taxable income now, while the Roth option lets you pay taxes now and enjoy tax-free investment growth.
- Loan and Withdrawal Options: TSP offers loan and withdrawal options that can provide substantial financial flexibility during your career and retirement.
- Portability: Portability is a huge benefit for those who may eventually leave federal service. If you leave federal service, you can keep your TSP account active, roll it into a new plan, or take a qualified withdrawal. This flexibility can be critical for many people.
Disadvantages of a Thrift Savings Plan
All investment involves a certain degree of risk, and not all retirement savings vehicles offer the same advantages. Just because you have access to a TSP doesn’t make it the best option available. Here are four disadvantages to consider:
- Limited Investment Choices: Compared to other options like IRAs or 401(k) plans, investments through a TSP are far more limited. If you were hoping for substantial diversification, you may want to look at other plan options.
- Complex Withdrawal Rules: If you want simple withdrawals, a TSP may not be the best plan, since the rules governing TSP withdrawals can be relatively complex and restrictive. You may find that the TSP just doesn’t fit your financial needs.
- Lack of Active Management: If you are looking for a more active role in the management of your plan, TSP may not be right for you.
- Roth TSP Limitations: While a Roth TSP can provide tax-free growth, it cannot offer the same tax deductions for contributions as a more traditional IRA would. For those in higher tax brackets, this can become a significant disadvantage.
Thrift Savings Plan vs. 401(k)
There are many situations where you, as a federal employee, may have access to both a TSP and a 401(k). To make the most informed decision, you should have a clear grasp of the differences between the two.
First, TSPs offer a far more limited selection of investment options. They tend to focus on broader market indices, which helps keep costs low but limits customization. A 401(k), on the other hand, will offer a far wider range of investment options that can include a broader array of stocks, bonds, ETFs, and actively managed funds.
Another notable difference is in the rules and terms regarding borrowing from your retirement account. Both plans will typically allow you to take out a loan from the plan, but TSPs have very specific rules that regulate loan eligibility and repayment.
Smart Summary
There are millions of savers taking advantage of the Thrift Savings Plan. No matter where you are in your service, considering your approach to retirement savings should be an integral part of your overall financial planning process. Don’t feel comfortable mapping this out yourself? Consider consulting a financial advisor to help you walk through the intricacies of your situation or learn more by exploring our Retirement 101 series.
(1) Federal News Network. Number of TSP participants receiving a full match reaches record high. Last Accessed January 19, 2025.
(2) Congress.gov. Summary: H.R.2672 — 99th Congress (1985-1986). Last Accessed January 19, 2025.
(3) Federal Register.gov. Federal Retirement Thrift Investment Board. Last Accessed January 19, 2025.
(4) Tsp.gov. Contribution Types. Last Accessed January 19, 2025.
(5) Tsp.gov. Fund Information March 2023. Last Accessed January 19, 2025.
(6) Tsp.gov. 2025 Contribution Limits. Last Accessed January 19, 2025.
