The Thrift Savings Plan has many advantages. The largest of which is the ability of participants to receive a match of up to 5% of their contributions. 

Additionally, the value of the tax-advantaged nature of TSP contributions cannot be overstated. 

1. Traditional Contributions:  The ability to contribute to the pre-tax portion of the TSP allows participants to reduce their current taxable income, subject to IRS limits. These contributions, along with any earnings, can grow tax-deferred until withdrawn. Distributions taken in retirement are generally taxed as ordinary income, since taxes were deferred at the time the contributions and earnings were accrued.
   • It is important to note that all employer matching contributions are considered "pre-tax."
2. Roth Contributions:  Prior to 2012, TSP participants did not have the ability to designate contributions as after-tax, or “Roth.” The introduction of Roth contributions provided participants with an additional tax treatment option. The primary difference between traditional and Roth contributions is the timing of taxation: Roth contributions are made on an after-tax basis, which increases taxable income in the year of contribution compared to pre-tax contributions. Once invested, Roth contributions and any associated earnings may grow tax-free within the account, provided applicable IRS requirements are met. Qualified withdrawals from the Roth portion of the TSP are generally tax-free; however, certain conditions must be satisfied for earnings to receive tax-free treatment.

So how much should you contribute to TSP Roth or Traditional each year? Well, it depends. When we work with our clients, we run a number of different forecasts to help improve the level of after-tax income each person may have in retirement, with the goal of reducing the overall taxes paid and supporting higher retirement income.

Investment Options

Now that we have covered how the taxation of different contributions is treated, we can review the different investment options available to TSP participants. There are many advantages of the Thrift Savings Plan. Two that I will cover here are simplicity and cost. Studies have shown that if we are presented with too many investment options we often have a hard time deciding. The beauty of the TSP is that it's so simple. The TSP offers five core investment funds, along with a range of Lifecycle (L) funds. Lifecycle funds are target-date funds that are intended to correspond to a participant’s expected retirement or withdrawal timeframe. Each Lifecycle fund is composed of the five core TSP funds (G, F, C, S, and I) in varying proportions. Over time, these funds follow a “glide path,” gradually shifting from a more growth-oriented allocation when retirement is further away to a more conservative allocation as the target date approaches. Lifecycle funds are designed with a goal to provide a diversified investment approach that automatically adjusts over time.

Another benefit of the TSP, and many qualified plans, is the low-cost structure. The TSP has very low expense ratios, which are among the lowest available in employer-sponsored retirement plans, which is a definite benefit of this plan.

There are also some limitations to consider. The TSP includes five core investment funds, each offering broad diversification rather than targeting specific sectors. While the TSP offers a streamlined and cost-efficient structure, it provides a more limited range of investment options and less flexibility compared to other investment platforms, particularly with respect to investment selection, withdrawal strategies, and advanced tax planning. While the plan is continually improving, its government-sponsored structure may not always offer the same level of flexibility as some individuals may need to adapt to a dynamic retirement lifestyle.

So how should you invest your TSP? It depends on a few factors.

1) How far away are you from retirement?
2) What are the economic conditions like? What is your risk temperament? How would you feel if your account dropped down by 50% in one year?
4) How involved do you want to be in managing your investments? Are you someone who wants to buy and hold, or will you be consistently making changes?

The truth is that an investment plan should be personalized to match you, and it should line up with your financial plan because every dollar has a purpose. 

*The information provided on this page is for illustrative purposes only. Actual performance and results will vary. This information does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted”