Federal employees don’t have access to the same kind of workplace retirement accounts as those in the private sector. If you recently joined the U.S. government workforce as a civilian or you’re a member of the military, your retirement investing goes through a different account called the Thrift Savings Plan (TSP).

The TSP is a government-sponsored retirement plan offered to federal employees, similar to a 401(k) that is offered through private companies. Think of it like a 401(k) for your federal government job.

(As of January 24, 2023, the federal government will underfund investments in the Government Securities Investment Fund, also known as the G Fund, which is part of the Thrift Savings Plan, as explained below. The change is expected to last until the federal debt limit is increased or suspended. The Treasury Department has said that the fund will be “made whole” once the debt impasse is resolved and that those with money in the fund would be unaffected. The move follows the suspension of new investments to the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund until June 5th as a means to conserve cash.)

How does a TSP work?

You are eligible to participate in a TSP if you are:

  •  A federal employee covered by the Federal Employees Retirement System (FERS).
  •  A federal employee covered by the Civil Service Retirement System (CSRS).
  •  A member of the uniformed services.
  •  A civilian in certain other categories of federal service such as some congressional positions, as well as some justices and judges.

Federal employees are automatically enrolled in the TSP with a 5 percent salary contribution. As part of the TSP, you are eligible to receive matching contributions from your agency or service, similar to how employers match 401(k) contributions. The 5 percent automatic contribution can be changed or reduced, but keep in mind that only those who elect to contribute at least 5 percent are eligible for a matching contribution.

New employees should be on the lookout for their TSP account number, online password and ThriftLine PIN, all of which arrive in the mail. ThriftLine is the automated response system for the TSP. From there, your online profile can be created, and you can begin making investment selections.

Types of investments available in the TSP

There are two major types of investments you can make in the TSP plan. The first, called L Funds or Life Funds, is similar to target-date funds found in 401(k)s. The second is an option for five individual investment funds, each with their own varying degree of risk and investment allocation.

L Funds

L Funds, or Life Funds, are similar to target-date funds in that they operate under the assumption participants won’t need their money for quite a long time. The funds automatically adjust to reflect risk reductions based on age and expectancy of account withdrawals, which means the younger you are, the riskier the investment allocation could be and the older you get, the more the fund moves into safer positions or cash so that your money is available for retirement. If you’re near retirement, the L Income Fund is recommended, as it’s designed to protect your assets.

Each L Fund is a mix of the five individual TSP investment funds, weighted according to risk and time horizon.

Individual TSP funds

The TSP offers five different investment funds participants can choose from if they do not choose the L Fund option. Each fund has its own risk level and is concentrated in different assets. The funds are as follows:

  • The Government Securities Investment (G) Fund: The G Fund is invested in short-term U.S. Treasury securities. It gives you the opportunity to earn rates of interest similar to those of long-term government securities with no risk of loss of principal. As always with government securities, their payment is backed by the full faith and credit of the U.S. government.
  • The Fixed Income Index Investment (F) Fund: F Fund investments are managed to track the Bloomberg Barclays U.S. Aggregate Bond Index, so investments are in U.S. government, mortgage-backed, corporate and foreign government bonds. This fund is considered higher risk than the G Fund but comes with low-to-moderate risk overall.
  • The Common Stock Index Investment (C) Fund: C Fund assets track the S&P 500 stock index, which means there is a moderate risk level associated with a higher potential rate of return.
  • The Small Capitalization Stock Index Investment (S) Fund: S Fund assets track the Dow Jones U.S. Completion Total Stock Market Index. This fund includes both small- and mid-cap stocks, making the risk level higher than that of the C Fund.
  • The International Stock Index Investment (I) Fund: The I Fund invests in an index that tracks the MSCI EAFE Index, exposing it to a broad range of international stocks. It consists primarily of large companies in more than 20 developed countries and gives global equity exposure to your account.

One important distinction to note: TSP funds are trust funds that are regulated by the Office of the Comptroller of the Currency — not by the Securities and Exchange Commission, as all other publicly listed equities are. As such, they don’t have tickers that can be easily searched. What investors can do, however, is track the corresponding indexes to their TSP fund of choice to see performance.

How much can you contribute to the TSP?

The IRS has set the TSP elective deferral limit for 2023 at $22,500.  The catch-up contribution limit, which is the maximum amount of additional money an employee can contribute over the $22,500 maximum, is $7,500 for participants turning age 50 or older in 2023.

Traditional TSP vs. Roth TSP

Similar to a 401(k) and IRA, there are traditional contribution options and Roth contribution options in the TSP.

  • With traditional contributions, the money you contribute is pre-tax, grows tax-deferred and is taxed on the back end once you begin to withdraw it.
  • In contrast, Roth contributions are taken out of your paycheck after it’s been taxed, meaning the taxes are paid on the front end, grow tax-free and are distributed tax-free once you begin qualified withdrawals. The catch is that you must be at least age 59½ and five years must have elapsed since Jan. 1 of the calendar year when you made your first Roth TSP contribution to begin qualified withdrawals.

Tax-exempt contributions

Contributions are allowed for uniformed services members while earning tax-exempt combat pay. Contributions designated as traditional contributions aren’t taxed, but earnings will be taxed when withdrawn. If the contributions are designated as Roth contributions, they will be tax-free at withdrawal, if qualifications are met.

TSP vs. 401(k)

The TSP was modeled after the 401(k) plan, but there are significant differences. Though tax treatments, limits and contribution schemes are similar, the range of investment options are quite different.

401(k) plans are offered by private companies that can offer essentially any mix of investments they like, providing a wide variety of possibilities to individual investors. They are only limited by their employer’s plan selections.

Bottom line

A TSP plan is a great way for federal employees to become involved in investing for their retirement. Though the investment options and rules are different from a traditional 401(k), the goals of both are largely the same.