What is the TSP?
The TSP is an employee sponsored (deferred compensation) retirement plan for federal employees. That’s fancy talk for saying that the TSP is simply an account that you can put money into to save for retirement. It acts just like a 401k (named after section 401k of the IRS code) but is only for federal employees. Differed compensation plan is a fancy way of saying that the TSP allows you to contribute a portion of your paycheck to it in order to save and invest for retirement. The current maximum you can contribute to your TSP is $23,500 for calendar year 2025. The minimum you can contribute is 1% of your base pay.
Why is the TSP good?
Money gives you options. The more you have, the more options in life you have. Options like whether you have to go to work or not. Options like what car you will buy, where you will live, where you can travel, what sort of lifestyle will you have, etc. By not YOLOing and spending all of your paycheck every month, you can start to build real wealth through compounding interest. This is where the TSP comes in. The TSP allows you to save (or more importantly invest) a portion of your paycheck every month so that your money will grow, and you will have more options in life.
One of the best things about the TSP is the low expense ratios it has on its fund options. Inside the TSP are several funds denoted by different letters; example, the C fund, the S fund, the I fund, etc. These funds represent different investments which we will discuss later in this post. Just know that somebody has to manage those investments and its not free. However, if you are not careful, the management fees (or expense ratios) can eat up your profits over time. Even seemingly innocent amounts of money such as a 1% annual expense ratio can eat up millions of dollars over a 40-year investing time horizon. The expense ratio of most funds in the TSP are 0.036%![1] That is excellent! This means for every $1,000 you contribute; you are only charged 36 cents.
But don’t take my word for it. Here is an example provided by my friend, Math. Let’s say you invest $200 a month into your TSP for 40 years and it averaged a rate of return of 10% per year. If your expense ratio was 0%, you would have $1,118,920. If your expense ratio was .03%, you would have $1,109,668. Basically, you paid $9,252 in fees for someone to manage the fund, produce tax statements, etc. That’s not too bad, after all there is no such thing as a free lunch. But what if the expense ratio was just 1%? That doesn’t sound that high, right? At 1% your TSP would be worth $849,929. That’s a $259,739 difference between an expense ratio of .03% and 1%! Yikes! That 1% expense ratio turned out to cost you over 23% of your total TSP worth. The big takeaway here is that the TSP is good because it offers great fund choices with low expense ratios.
Can I put money from anywhere into my TSP?
One of the big takeaways is that you cannot right a check to the TSP or put money in from other sources (bank transfers, wire transfers, etc.). The money contributed to your TSP must be deducted from your paycheck. In the military, only your base pay, incentive pay (like language pay or hazardous duty pay), bonus pay, and specialty pays (like aviation pay or doctors pay) can go toward your TSP. So, BAH and subsistence allowance cannot be deducted into your TSP.
Why is this important? Let’s say you want to put 10% of your paycheck into the TSP and you make $50,000 a year. That $50,000 is hypothetically broken down like this:
- $30,000 base pay
- $15,000 BAH
- $5,000 BAS
If you select 10% to go into your TSP through My Pay (more on this in a minute), only $3,000 a year will go into your TSP because it only pulls from base pay (or the other pays mentioned above). So, if you wanted to contribute 10% of your total pay (aka $5,000), you would need to run the calculation ($5,000 ÷ $30,000 = 16.6%). By setting your contribution percentage to 16.6%, you would be able to contribute $5,000 a year or 10% of your total pay. Weird side note, TSP won’t let you do decimal percentages, so I would round up to 17% in this example and save the extra $100.
How do I set up my TSP?
Step #1: Go to TSP.gov and set up your account. This may have been done for you if you are in the military, but you will still need to establish your own personal log in.
Step #2: Once your account is established, you will log into MyPay.dfas.mil to set up your contribution percentage (or how much of your paycheck you want to save). On the left-hand side of the menu at the very bottom is written “Thrift Savings Plan (TSP).” You will click on that. It will bring up an option for you to select what percentage of each type of pay you want to go into your TSP. It also has those percentages listed under two options: Traditional TSP and Roth TSP. I will address these in a minute, but without knowing your specific tax situation I cannot recommend which one you should do. A general rule of thumb is that if your marginal income tax rate (federal income tax rate + state income tax rate + local income tax rate) is 25% or greater, you should go with Traditional. If your tax rate is lower than that (which applies to the vast majority of the military) you should select Roth. Input how much of each pay you want to go into your TSP and save it.
Step #3: Log into TSP.gov and select which funds you want your money to go into. Click on “Investments,” then click “Change Investments,” then click “Change your investment mix.” This will bring a list of funds with percentages next to them. Input how much of each fund you want to buy each time. Your total percentage should always equal 100%. For example, I currently do 90% C Fund and 10% S Fund (*not investment advice). If you previously had money going into your TSP, you can change the allocation (or which funds they are in) by going to “Investments,” “Change Investments,” and “move money between funds.” It is critical that you select a fund, otherwise your money maybe sitting in the account, uninvested, earning you next to nothing.
As a side note, the default fund used to be the G fund until 2014. The G fund never loses money but also doesn’t make much. The new default fund is the L fund. The TSP takes your age and puts you in an appropriate L fund based on a retirement age of 62.[2] For example if you are 22 years old when you join the military, your TSP contributions will automatically go into the L 2065 Fund. Note that the funds are in year groups of 5 years so it might not be exact (L 2055, L 2060, L 2065, etc.)
What are the funds of the TSP?
The TSP has six funds that you can choose from. They are as follows (with a brief description):
C Common Stock Fund (based after the S&P 500)
S Small Cap Fund (comprised of roughly 4,500 companies not in S&P 500)
I International Fund (comprised of index funds from markets outside the U.S.)
F Fixed Income Fund (comprised of multiple bonds and treasuries)
G Government Securities Fund (comprised of treasury bills and government securities)
L Lifecycle Funds (comprised of all the funds; goes from risky to conservative as you age)
The C fund (also known as the TSP Common Stock Index Investment Fund) is an index fund based on the Standard and Poor’s (S&P) 500 index and invests in the top 500 publicly traded companies in the U.S. stock market.[3] These are companies like Apple, Amazon, Tesla, Nvidia, and Alphabet (Google). The C fund is market capacity weighted, meaning that the fund purchases more of the bigger companies and less of the smaller companies. For example, the fund owns more shares of Amazon than it does Pfizer because Amazon is worth more as a company (Google “Price to Earnings Ratio”). The majority of all growth in the U.S. stock market has come from the companies in the C fund. It is the best fund you can own for growth as it has averaged over 11% annualized rate of return since 1988.
The S fund (also known as the TSP Small Cap Stock Index Investment Fund) tracks the Dow Jones US Completion Total Stock Market Index. This is a fancy way of saying that the S fund invests in all of the other publicly traded companies that are not in the C fund. These are smaller companies like Texas Roadhouse or Dell. Although these companies are not worth as much as the ones in the C fund, every now and then you’ll get a company that catches fire and lifts this fund (such as Tesla before it joined the C fund). The S fund has had great returns throughout its inception averaging an annual rate of return of over 9.6%. It’s a great fund to round out your total portfolio.
The I fund (also known as the TSP International Stock Index Investment Fund) is a fund that owns international stocks or companies outside of the U.S. It follows the MSCI ACWI IMI ex China, HK, USA Index. This means that it does not invest in Chinese companies, American companies, or companies in Hong Kong. It invests in Asian markets as well as European markets trying to incorporate stocks from all over the world. Some financial gurus recommend having some of your total investment portfolio in international stocks. This fund, however, has not performed well over the long run, averaging an annualized return of just 6.2% since 1988.[4]
The F fund (also known as the TSP Fixed Income Index Investment Fund) is a fund that follows the Bloomberg US Aggregate Bond Index. Basically, you are buying an index fund of bonds which are very stable and do not fluctuate greatly. Investors who are risk averse or who are getting ready to draw down from their TSP normally convert a large portion of their assets to this fund as it provides some additional safety from dips in the stock market. The average annual return since inception is 5.3%.
The G fund (also know as the TSP Government Securities Investment Fund) is a fund invested entirely in long term U.S. government bonds. The benefit of the G fund is that it is an extremely safe fund that never loses money. The downside of the G fund is that it also does not make very much money. The average annualized return of the G fund since inception is 4.7%, but that is skewed because in the 1980s it was offering 10% returns at one point. Over the last 10 years, the G fund has returned an average of 2.6%, where in contrast the C fund has returned 12.8% over that same period. But if you can’t stand to lose money, then the G fund maybe for you.
L funds or TSP Lifecycle Funds are target date retirement funds that buy a little of all of the funds in the TSP based on your estimated retirement date. For example, if you think you want to retire in the year 2055, then you would buy the TSP L 2055 fund. The cool thing about these funds is that they are managed for you and de-risk as you get older. When you are younger, the L fund is invested heavily in the C, S, and I fund with very little in the F and G fund. This is because those funds typically make more money and because you have more time to recover should those funds lose money. As you get older, the fund manager sells more of the C, S, and I fund and buys more of F and G to de-risk your portfolio. L funds are great for people who don’t want to manage anything themselves. They are set and forget funds that will work out quite well. What is the downside? In my opinion they are too conservative and do not give you long enough exposure to the C and S fund. You will definitely leave some money on the table going with an L fund, but you eliminate worry and hassle. The L fund is also now the default fund for those starting their investment into the TSP. You have to go into TSP.gov to change your investments if you want out of the L fund.
What is the difference between Roth and Traditional TSP?
Just like with a 401k, the TSP offers a Traditional and a Roth version. The Traditional version takes money from your paycheck before it is taxed and invests it into your TSP. That money then grows tax free until you withdraw it. Once you pull the money out, it gets taxed at your ordinary income tax rate. Roth works the opposite. You put money from your paycheck into your TSP that has been taxed, then it grows tax free and when you pull it out, you don’t have to pay any taxes on it.
So, which one is better? Depends on your marginal income tax rate. A general rule of thumb is that if you and your spouse pay over 25% in taxes between your federal income tax rate, state income tax rate, and local income tax rate, then you should invest in the Traditional TSP and get the tax savings upfront. If that same tax rate calculation is below 25%, then you are better off investing in the Roth TSP (this will be case for most people). The thinking behind this is that once you retire, you should be able to manipulate your tax bracket by strategically pulling out money from different investment vehicles (such as a Roth IRA, Traditional IRA, and taxable brokerage account). Therefore, getting tax savings early on for those in a higher tax bracket will be more beneficial.
When can I access the money?
The TSP is designed to be a retirement account that sustains you in your old age, therefore the government has put rules in place to dissuade you from drawing out funds early. It is generally accepted that you can withdraw as much as you want from your TSP at the age of 59 ½ without having to pay any sort of early withdraw penalty. The early withdraw penalty for taking out money from your TSP is 10%. Just keep in mind that this is still an option depending on your financial situation.
Exceptions to the rule: Below are some (but not all) exceptions to the early withdraw penalty rule.
- If you retire from the federal government in the year in which you turn 55 or anytime between the ages of 55-59 ½, you can withdraw from your TSP penalty free.
- IRS section 72(t)(2)(B) allows you to set up distributions to withdraw money from your TSP just like making it an annuity (or pension).[5] The official name of this strategy is Substantially Equal Periodic Payments (SEPP). This is complicated to do from a tax perspective, and you have to withdraw the same amount of money out every year, but if you do this, you can withdraw money out early and avoid penalties. For example, let’s say you are 45 years old, retired from the military, and need $80,000 a year to live of off. If your military pension plus your VA disability payments equal $50,000, then you would need $30,000 a year to cover the rest. You could set up a SEPP in which you withdraw $30,000 a year from your TSP (before the age of 59 ½) and it would not be subject to the 10% early withdraw penalty. Then once you turn 59 ½ you can take out as much as you want without any penalties. *Note: this is a general overview of rule 72(t) but there are lot more nuisances to consider. Do your research before attempting.
Wrapping it up
Well, that about does. I know I didn’t discuss TSP loans, so maybe its not everything you need to know about the TSP, but I did address a lot. Let me know if there is anything that you would like to see clarified or more information on. Best of luck navigating the TSP!
*This article was written by FUBAR 6. All opinions expressed in this article are that of the author. This article is not endorsed by the Department of Defense, the United States Army, or any other state or government agency. This article does not constitute financial advice. Any actions taken by the reader are at their own discretion. Comments to the author can be submitted below.
[1] https://www.tsp.gov/tsp-basics/expenses-and-fees/
[2] https://www.morningstar.com/personal-finance/closer-look-us-thrift-savings-plan-tsp-funds-2024
[3] https://www.morningstar.com/personal-finance/closer-look-us-thrift-savings-plan-tsp-funds-2024
[4] https://www.tspfolio.com/tspfunds
[5] https://www.irs.gov/pub/irs-drop/rr-02-62.pdf