What is the TSP?
It is a retirement savings plan like a 401k or 403b plans in the private sector (or real world!). These are often called defined-contribution plans, which are plans where employees contribute a fixed amount or a percentage of their paychecks to an account to fund their retirements.
The company will sometimes match a certain amount of the contribution from the employee. These plans are typically tax-deferred, and not accessible without penalty until retirement age (a minimum of 59 1/2 years old).
In June 1986, President Reagan signed the Federal Employees Retirement System Act into law, providing three different retirement sources: a basic benefits plan, Social Security, and a Thrift Savings Plan (TSP). At the time, this did not include military members.
In May 1997, the tsp.gov website was launched. In July of 2001, participants could transfer funds from their IRA and other plans into the TSP.
In January of 2002, the military began contributing to the TSP. Lifecycle funds were introduced in 2005, and Roth TSPs in 2012.
Most employees of the US Government are eligible for the Thrift Savings Plan (TSP).
You are eligible if you are:
- A Federal Employees’ Retirement System (FERS) employee (generally if you were hired on or after January 1, 1984), or
- A Civil Service Retirement System (CSRS) employee (generally if you were hired before January 1, 1984 and did not convert to FERS), or
- A civilian in certain other categories of Government service
In addition to being covered by an eligible retirement system, you must also be:
- Actively employed by the Federal Government as a civilian employee or as a member of the uniformed services,
- In pay status, in order to contribute, and
- Working full- or part-time.
The TSP’s expenses are competitive. In 2018, the average net expense was $0.40 per $1,000 invested.
Another way of saying this is it’s an expense ratio of .04% or 4.0 basis points.
This is roughly equal to the expense ratios of the cheapest index funds at Charles Schwab, Vanguard, or Fidelity, making it very competitive, and almost negligible.
To be fair, Fidelity actually has a few index funds that have zero expenses.
The G Fund assets (discussed later) are managed internally by the Federal Retirement Thrift Investment Board. The rest of the funds, consisting of F, C, S, and I, the Federal Retirement Thrift Investment Board contracts BlackRock Institutional Trust Company to manage.
BlackRock, Inc. is an American global investment management corporation that is currently the world’s largest asset manager with almost $7 trillion in assets under management in over 100 countries.
The government picked a great company to manage this for us!
How to Enroll in TSP
If you are in the military, enrolling is different whether you joined before or after January 1, 2018.
If you joined the military before January 1, 2018, enrollment is not automatic. You enroll online using the MyPay system, or you fill out the Form TSP-U-1 and turn it in to your finance office.
If you joined the military on or after January 1, 2018, you are covered under the new blended retirement system. This means the government will match some of your contributions (to be explained later).
Your service will also automatically enroll you in the TSP at the 60 day point. Additionally, your service will automatically set your contribution at 3% and will choose the traditional TSP for you (versus the Roth TSP).
Remember to contribute at least 5% of basic pay to your TSP account so that you can receive the full amount of service matching contributions. The default amount of 3% that they automatically enroll you in will not be enough for the full benefit, and you’ll have to be proactive to change it.Rich on Money
Re-entering Military Members
If you were already in the blended retirement system (BRS) plan before you left the service, you will be automatically reenrolled. If you were not BRS but had fewer than 12 years of service when you left, your service may give you the opportunity to opt in when you reenter.
In either case, assuming you served 60 or more days before leaving, your enrollment will begin the first pay period after reentering. If neither situation applies to you, you can start an account from scratch or continue contributing to an existing account. Utilize the Mypay website, and/or the TSP-U-1 form.
If you fall under the Federal Employees Retirement System (FERS) (government civilians) and you were hired after July 31, 2010, your agency should have automatically enrolled you in TSP, and they should have set paycheck deductions to 3% automatically as well.
If you were hired before August 1, 2010, you should already have a TSP account with accruing 1% agency contributions.
When you enroll, you have two important decisions to make.
1. Contributions – How much of, and what parts of your pay to contribute, up to the maximum of $19,000 for 2019.
2. Tax Advantage Type – Whether to invest those contributions in a traditional TSP, Roth TSP, or a combination of the two.
Automatic Enrollment Refunds
If you were automatically enrolled in the TSP and didn’t want to be, you can request a refund of your contributions that were made during the first 90 days of your automatic enrollment period.
To request a refund, you must submit Form TSP-25, Automatic Enrollment Refund Request, before the expiration of this 90-day period.
If you are a FERS or BRS participant, you will lose your agency matching, but you will keep your automatic 1% contribution. We are not talking big money here!
There are three different types of limits that matter for TSP contributions.
1. The Elective Deferral Limit – $19,000
2. The Annual Addition Limit – $56,000
3. The Catch-up Contribution Limit – $6,000
The first one is the most common. The second and third apply in more specialized circumstances.
Elective Deferral Limit
For military members, this is the amount you can defer from your paycheck either into a Traditional or Roth TSP (we’ll talk about these important differences later). In addition to base pay, this can come from special, incentive, and bonus pay.
Annual Addition Limit
This is the limit for all contributions in a calendar year. For a military member, you could only use this limit when deployed and receiving tax- free income. This number includes the $19,000 Deferral limit. Contributions above the deferral limit automatically go into the traditional TSP.
A military member could contribute $19,000 normally into either the traditional or Roth TSP (or a combination of the two), and then could contribute $37,000 ($19,000 + $37,000 = $56,000 Annual Additional Limit) more from deployed untaxed pay which would automatically go into the traditional TSP.
*Remember that if you have matching, it applies to the $56,000 limit
Catch-up Contribution Limit
If you are at least 50 years old, you can contribute an additional $6,000 per year on top of both the elective deferral ($19,000 + $5,000 = $25,000) and annual addition ($62,000) limit.
Typical Military Contribution
A majority of the time, you only need consider the elective deferral limit of $19,000 for 2019. Watch it, as it changes quite often. It changed from being $18,500 in 2018 to $19,000 for 2019.
For years in which you are not deploying, you will simply figure out how to contribute as much as you can, up to the elective deferral limit. For 2019, this will be $19,000, but it could increase each calendar year.
Keep in mind, if you reach this limit before the end of the year, your TSP contributions stop automatically and matching also stops. For this reason, take care to spread your payments out evenly and not miss out on matching that you otherwise would have gotten.
Use this calculator from the TSP website to figure out how to plan your contributions.
How Much Should I contribute to the TSP?
This depends on many factors, such as what your savings goals are, what your current income is, and what other debt as well as investments you currently have.
As a generic rule, I personally feel like the TSP is one of the best investments out there. I would try to fund it before funding an IRA, putting money in savings, or funding any taxable account, such as a brokerage or mutual fund accounts.
I would certainly choose fully funding my TSP before investing in real estate.
Keep in mind, I’m a real estate investor who currently owns 20 houses that are paid off, so I’m not averse to real estate investing!
The TSP have low fees that are comparable to the fees of index funds at Fidelity, Schwab, and Vanguard. For some information on what fees you’ll pay at these companies, read my posts:
I realize it won’t be possible for everyone to max out their TSP elective deferral limits, especially early in their careers. You should work towards it, however. I’ve been maxing out mine for the last 10 years or so.
I’m upset that I didn’t start maxing it out earlier in my career. I could have easily, and I’d be a lot wealthier had I.
Learn from my easily avoidable mistake!
By the way, if you have two new iPhones, husband/wife matching Harleys, take nice vacations every year, and drive newer cars, don’t you dare tell me you can’t afford to max out your TSP. You just need to readjust your priorities!
True wealth and financial independence comes from putting away a substantial nest egg in your early years. A TSP is the fastest way to do that for a military member or government employee. You may or may not get a pension, but you will take that TSP with you!
Traditional vs. Roth Thrift Savings Plan
It is important to understand key characteristics of both the traditional and Roth TSP so you can decide which is better for you. Keep in mind, you can have both in your account, and even contribute to both at the same time.
The differences between these are very similar between the choice you have of a traditional and Roth IRA.
Traditional Thrift Savings Plan
Tax treatment is the main difference between the two. In a traditional TSP, the money is taken from your paycheck before it has been taxed, and then placed into the TSP account.
That money can be invested in one of the funds. It grows and compounds until you withdrawal it, typically after the age of 59 1/2. At this point, the contributions you made and the growth that has occurred in the account have all never been taxed. When you take it out, it is counted as taxable income, and you pay taxes on that money for the first time.
The advantage of this is, when you contribute the money, it is deducted from your taxable income for that year. In other words, it reduces your taxable income in the year you contribute the money.
With a traditional TSP, you are skipping taxes now, but paying those taxes later.
A Roth TSP is the opposite of that.
You pay your taxes now, but then never pay them again, even after the money grows and compounds.
Roth Thrift Savings Plan
A Roth TSP allows you do something very different with your taxes for retirement.
Instead of taking a tax deduction each year you contribute to the TSP, in a Roth TSP, you pay taxes on your contributions and don’t deduct them, but then the money in your account is NEVER taxed again.
This is important.
I will explain why.
Normally, with a traditional TSP, when you take money out of your account at the eligible age (usually 59 1/2 years old), everything is considered taxable income. This is because you have never paid taxes on this money before. You have to claim it on your taxes and it raises your taxable income.
If you have social security, a traditional IRA, a pension check, income from real estate and investments, and/or income from another job, these also will be taxable income along with your traditional TSP.
Now the beauty of a Roth IRA.
It kinda sucked, because you didn’t get to take a tax deduction the year you contributed to like you did with a traditional TSP, BUT…
When you withdrawal this money once you are eligible to (in most cases, after 59 1/2 years old), the contributions as well as the growth from those contributions are all tax-free to you. With the compounding that could have happened over 20, 30, or 40 years, this could be HUGE!!!
So all those other things I mentioned would be counted as taxable income
Traditional IRA, traditional 401k, pension (depending on the state), rental property income, Social Security income (depending on the state) Walmart paycheck, etc…
A Roth TSP withdrawal, Rot 401k or a Roth IRA withdrawal would not be counted as taxable income. This would keep your taxes down in those golden years.
Could come in handy…
Should I Contribute to Traditional TSP or Roth TSP
This same question for IRA’s is one of the most asked of all-time in finance circles.
And keep in mind, you can contribute to both!
I’m not so sure how important the answer is.
The most important thing is that you save as much as you can.
Putting money away for retirement that is tax advantaged is the number one thing.
Picking the right type of tax advantaged will also be helpful, but some of it will be guesswork about our futures, and hoping tax laws are in our favor.
It would be nice to pick the right one right now, but don’t obsess over it!
To reiterate the differences
The main point is to understand how the taxes are treated different for a Roth TSP vs. a traditional TSP.
In the traditional TSP, you don’t pay taxes on the money you contribute in the year you put it into your account. You do this every year, and deduct that amount from your taxable income, saving you money in taxes each year.
On the flip side, once you work your way through life, you pay taxes on all the money, original contributions and growth, when you withdrawal the money. You shouldn’t withdrawal the money until you are eligible (usually 59 1/2 years old), or you’ll pay a 10% penalty on top of taxes.
This essentially means, if you expect to be making more money, or potentially about the same money, throughout your working life then you will once eligible to withdrawal your TSP, then traditional TSP is the way to go. Take that savings now!
You are better off saving on taxes now when you make more then saving on them later, when you might make less, or roughly the same. Who knows what will happen with tax laws, but take that savings you know you can get now!
In the Roth, it’s the opposite. The money you put into your TSP throughout your working life is normal taxed income, so you don’t take a tax deduction and don’t save money in taxes in the year you contribute.
Later in life, when you are eligible to withdrawal the Roth TSP money, the original contributions and growth you take out is tax-free money.
So if you plan to be more wealthy in the years you are eligible to withdrawal from your TSP then you will be during the years you are contributing, you may be better off with a Roth TSP.
In other words, if you are planning on being quite well off when you’re old and living frugally when you’re young, Roth might be the way to go. This is my plan.
I sure hope I don’t die young!
Roth TSP offers another little-known large advantage not available in the traditional TSP.
Once it has reach 5 years from January 1st of the year you first contributed to your Roth TSP, The contributions you make to the TSP can be withdrawn at any time without penalty.
Keep in mind, I said the contributions, but NOT the growth.
This can be very useful to some people who end up retiring early and need to fund the gap between retirement and 59 ½ when they are eligible for full access to the TSP. It could also come in handy for emergencies, down payments on a home, etc.
A caution to doing this!
The magic of a TSP is that the government is allowing you to legally cheat on taxes. You put a bunch of money in it each year and it grows and compounds tax-free.
The magic of that is the compounding over years and years.
That is disrupted severely by you pulling out your own contributions. By taking those out, there is less money to grow and compound. The government doesn’t care, because in a Roth IRA, they’ve already got their taxes from that money. The only person that will be affected is you. You are just robbing yourself of future growth.
You can take those contributions back, but at a future cost.
By the way, the same exact cautionary argument holds true for taking a loan from your own TSP (or 401k for that matter).
Just because you can do something doesn’t mean you should. (This advice doesn’t apply just to TSP investments!)
The Blended Retirement System
Those military members who fall under the newly available blended retirement system (BRS) will have access to matching of funds within the TSP. I’ll briefly explain what the BRS is here.
For most military members in the past, including myself, there has been no matching in the TSP (what’s up with that?). That changed for people who are coming into the military more recently when the Senate Armed Service Committee passed the FY 2016 National Defense Authorization Act (NDAA). A major part of that was military reform.
Now, if you entered the Uniformed Services on or after Jan. 1, 2018, you are automatically enrolled in the BRS.
The BRS is a new retirement plan with matching TSP contributions, a decreased pension multiplier, and a career retention bonus.
It does not affect those already serving, like myself. One of the major differences is how it affects retired pay. The retired pay will be lower under the new system, but matching is supposed to make up for that, especially because 85% of military don’t make it to retirement!
Matching in the Thrift Savings Plan
Matching, or agency contributions in the TSP, is something recent for military members, but something that has existed for a long time for government civilians.
If you are a BRS or Federal Employees Retirement System (FERS) employee, your agency will contribute 1% of your basic pay each pay date to your TSP account. These happen whether you contribute or not! It’s not actually matching, it’s an automatic contribution.
You don’t get to keep this 1% of your basic pay until you are vested, which means until you’re entitled because you’ve met the following requirements per your employee type:
- BRS members become vested in Service Automatic (1%) Contributions after 2 years of service.
- Most FERS participants are vested in Agency Automatic (1%) Contributions after completing 3 years of service.
- FERS employees in congressional and certain noncareer positions become vested in Agency Automatic (1%) Contributions after 2 years of service.
If you leave before vested, you lose this money.
Now here’s the actual matching.
If you are BRS or FERS employee, you receive matching contributions on the first 5% of pay that you contribute each pay period. The first 3% you contribute is matched dollar-for-dollar, then the following 2% is matched at 50 cents on the dollar.
Anything above 5% is not matched. If you stop making contributions, the matching also stop. If you reach your maximum allowable contributions for the year, matching contributions also stop.
This chart clarifies what I said earlier about how matching works:
The TSP Funds
G Fund – Government Securities Investment Fund
This fund is invested in nonmarketable short-term U.S. Treasury securities that are specially issued to the TSP. The interest rate calculation is based on the weighted average yield of all outstanding treasury notes and bonds with 4 or more years to maturity. Boring.
This is a very fancy way of saying it’s a safe investment that will most likely not lose money, and likely keep up with inflation, as it has done historically.
This chart, from the tsp.gov website, show the returns over the last several years. You can expect something between 1.5 and 3% in recent years. Historically, it’s been a bit higher, with an average annual return of 5% since 1987.
Average Annual Returns (As of December 2018)
|Since April 1, 1987||5.03%|
Who is the G Fund For?
If you want all or a portion of your assets protected from loss. You place a higher priority on preserving your money over long-term growth you could get using the other funds.
F Fund – Fixed Income Index Investment Fund
The F fund assets are managed to track the Bloomberg Barclays U.S. Aggregate Bond Index. This includes U.S. Government, mortgage backed, corporate, and foreign government (issued in the U.S.) sectors of the U.S. bond market. The earnings come from the interest on these bonds and gains on losses in value of the securities. Boring.
Bonds are really safe. Not as safe as U.S. treasuries, like we saw with the G fund, but safer then investing in the stock market at large, like you’ll see in the C, S, and I funds.
On a scale of risk, it’s considered slightly riskier then investing in short term securities such as the G fund, so you can expect to earn higher rates of return over the long term.
Average Annual Returns (As of December 2018)
|Since January 29, 1988||6.04%||6.05%|
Who is the F Fund For?
When interest rates are falling, the F Fund theoretically will experience gains from the resulting rise in bond prices. In this case, one may expect to exceed returns of the G fund, although you could also have greater price volatility (up and down movements).
The F Fund can be used for those that believe in diversification. Bonds and stocks do not always move in the same direction. If your retirement portfolio contained both, it potentially would be less volatile.
C Fund – Common Stock Index Investment Fund
The C Fund’s investment objective is to match the performance of the Standard and Poor’s 500, commonly known as the S&P 500 Index. This is probably the most commonly cited index fund in the stock market.
It is a broad market index made up of stocks of 500 large to medium sized U.S. companies. The largest companies in the index are definitely ones you’ve heard of:
Apple, Microsoft, ExxonMobil, Johnson & Johnson, GE, Amazon.com, Facebook, Berkshire Hathaway…
The index is self-cleansing. In other words, companies leave the index as they fall out favor, go bankrupt, etc. New companies take their place, but your investment in the S&P 500 as a whole stays the same. It’s managed by the TSP.
This is the beauty and safety of index funds.
Here is a chart that shows the annual returns over the last several years.
Who is the C Fund For?
The C fund is useful for anyone that wants to invest in the S&P 500 index either exclusively, or as a portion of their portfolio. The S and I funds also invest in stocks, but they are different segments of the stock market, and do not overlap. The C fund can also be very useful in a portfolio with bonds to smooth out the volatility.
Volatility of C, S, and I Funds
Returns on stocks and stock indexes can vary greatly. Over short periods of time, they can be quite unpredictable. Over long periods of time, the returns can be quite predictable, and good.
You should be careful investing in stocks, or the C, S, or I funds for any short amount of time because of the short term volatility of these funds. See the following chart of the C fund.
Monthly Returns (12 Months)
This is a snapshot of a 12 month timeframe. As you can see, there were large changes of sometimes 8 or 9% up or down throughout the year. There could timeframes that are even more volatile than this where it is 20 or 30% in a day or two. During a crash it could be more.
The important point is, when you are investing for the long term, these prices changes, even the crashes, don’t matter.
This is because on average, the stock market at large has been giving returns over the past several decades of between 8-10% if you just invest your money in and index like the C or S Fund and don’t touch it!
Average Annual Returns (As of December 2018)
|C Fund*||S&P 500 Index|
|Since January 29, 1988||10.01%||10.05%|
Index funds aren’t your only solution, and past performance is no guarantee of future performance. You can try the L funds which are professionally managed, or you can add bonds to the funds to smooth out the ride, but I just offer this information as a data point about volatility with these funds over the short term vs. long term.
S Fund – Small Cap Stock Index Investment Fund
This fund invests in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index. It is a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.
If you were to invest your TSP in a ratio of about 15% C and 85% S, you would roughly hold all the stocks in the U.S. stock market in about the right proportion. There are index funds out there called something like Total Stock Market Index Funds, and you would be roughly mimicking those with this allotment. Vanguard has a fund called VTSAX which is about the same thing.
The S funds volatility and returns are roughly equivalent to C. You would be really splitting hairs to try to call out differences between the two or say one is better than the other. The major difference is, S is investing in smaller companies, and C in larger. There could slight differences over certain economic cycles. Over the long term, they will very close.
Here are two charts.
Average Annual Returns (As of December 2018)
|Since May 1, 2001||8.21%||8.07%|
The C and S funds have almost identical 10 year averages.
Who is the S Fund For?
The S fund is useful for anyone that wants to invest in a small cap stock index fund, either exclusively, or as a portion of their portfolio. The C and I funds also invest in stocks, but they are different segments of the stock market, and do not overlap. The S fund can also be very useful in a portfolio with bonds to smooth out the volatility.
I Fund – International Stock Index Investment Fund
This fund fully replicates the Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East Index) fund. It invests in the stocks and currencies of foreign countries.
An interesting note about this particular international index fund is which countries it focuses on. It really only focuses on large, well established countries.
The fund doesn’t target emerging or growing international markets, and some would argue it has stagnated/stagnating countries.
Take Japan for example. 25% of the fund is in Japan, whose been in a funk for a long time. Another 25% is in France and the U.K. Not necessarily growth powerhouses these days.
Lyn Alden has a section in her comprehensive post on the TSP that highlights in great detail her reservations with the I Fund.
My point is, this international index is not truly international, it’s limited to larger, well-established countries.
Just something to think about.
Returns have not been great compared to the C and S funds. Here are some charts taken from TSP.gov
Average Annual Returns (As of December 2018)
|I Fund*||EAFE Index|
|Since May 1, 2001||4.09%||3.96%|
Who is the I Fund For?
For those who want diversification, it can be useful to have something outside of exclusively U.S. stocks. In today’s world, however, U.S. companies are global, so there may be some overlap. This does allow you to invest in the currencies of other markets as well.
I personally have shied away from using this particular fund heavily in my portfolio. I haven’t been impressed with its long term performance, and I’m not at a point where diversification is important to me. You should consult a professional and make your own informed decision.
L Fund – The Lifecycle Funds
The assumption is the longer your time horizon, the more risk you are able to tolerate while seeking higher returns. The funds automatically adjust to reflect a reduced ability to sustain risk at the withdrawal time horizon approaches.
There are currently 5 L funds. You choose your L fund based on the date you anticipate needing to start withdrawing your money.
L 2050 — For beneficiary participants who will need their money in the year 2045 or later.
L 2040 — For beneficiary participants who will need their money between 2035 and 2044.
L 2030 — For beneficiary participants who will need their money between 2025 and 2034.
L 2020 — For beneficiary participants who will need their money between 2020 and 2024.
L Income — For beneficiary participants who expect to begin withdrawing their money before 2020.
The L fund uses professional investors to choose a mix of all 5 funds that is aggressive enough for how far away you are from needing your money. Here is an example of how the L 2050 fund is setup:
As the fund approaches the time you need to withdrawal it, it gradually adjusts itself on a quarterly basis to be more conservative. You don’t need to worry about this, it happens automatically, and at a very low cost (About .04%).
So you start with the allocation of your chosen L fund, and then it automatically gradually moves to the most conservative allocation, which is called the L Income fund. This is for participants who are currently withdrawing their TSP accounts or for those who plan to begin withdrawing.
Here is an example of what the L Income fund is setup like once you reach the funds maturity date:
Who is the L Fund For?
The L Funds were created by the TSP for those who don’t have the time, experience, or interest to manage your own TSP account. It is for the person who does not want to try to diversify among the funds themselves.
If you are a civilian who enrolled in the TSP before September 5, 2015, or you are a non-BRS uniformed services member, then until you choose another investment option, all contributions to your account will be deposited into the G fund.
This is VERY IMPORTANT.
The default if you don’t change it is not a very good one.
Many people have found themselves invested in the G fund after 5, 10, or even 15 years because they didn’t change it.
They didn’t check.
Remember, the G fund is treasuries. You’ll barely outpace inflation. It’s like a high-yield savings account. You would really do yourself a disservice by investing here by accident over the long term, so make sure to change this to what you mean it to be.
If you are a civilian and you were enrolled on or after September 5, 2015, or you are a BRS participant, then unless you choose another investment option, you will automatically be put in the L Fund most appropriate for your age.
If you forget to change it, you’ll actually end up in something that makes sense. This will be diversified in a way that’s appropriate for your retirement horizon, so you aren’t too bad off if you forget to adjust it for a while.
Making or Changing the Allocation
If you know how you want your money to be invested, you can set up your contribution allocation. That can be done in a few different places. It can be done at tsp.gov and at Mypay for uniformed service members. It can also be done through Thriftline (link and/or phone#). You’ll need your TSP account number and 4-digit personal pin.
Contribution allocations made on the TSP website or the ThriftLine before 12 noon Eastern time are processed on that business day. After that, it goes to the next business day.
Your contribution allocation tells the TSP in what percentage to invest the money between the different funds available. If you have money being split between going to Roth an traditional IRA, you will not be able to split up how the money is allocated fund-wise, it will be done equally between all.
The new money being put into the TSP can be coming from you, from your agency or service contributions (matching if you are a FERS or BRS participant), your TSP loan payments, and any transferred or rollover funds from other retirement plans. You can make a contribution allocation at any time.
Your contribution allocation will not change the allocation of what already exists in your account. It only allocates new money as it is put in. To change the allocation of the money that already exists in the account, perform a interfund transfer which can be done at the tsp.gov website.
The contribution allocation you set up stays in effect until you change it to something else.
How Should You Invest in Your TSP?
This is a difficult questions that depends largely on your personal situation. You should consider your own risk tolerance, family situation and obligations, health situation including family, short and long term financial goals, time left until you need to access your funds, etc.
Keep in mind, typically the earliest you can access these funds without penalty is 59 ½. There are exceptions to this, but I think it’s best to wait.
If you have a lot of time until you need to access your funds, you can afford to invest more aggressively and ride out market corrections. If you are close to needing to start withdrawing your money, it may be wise to shift towards a more conservative stance.
A market correction or crash at the beginning of your withdrawal period can have a devastating effect on your future portfolio balance.
You don’t have to necessarily stick with the Lifecycle funds as your only form of diversification. There are many ways to mix and match the existing funds in ways that can make for a strong portfolio.
If you are not sure to start, there is advice from people like Dave Ramsey, Paul Merriman, and even Warren Buffett on how the money in your TSP could be invested.
I’ve put some of these ideas into a separate article. It’s one of my most popular. You can read it here:
Transferring Money Directly Into TSP
Money from a traditional IRA or an employer plan like a traditional or Roth 401k can be either partially or all transferred into your TSP account. This is called a transfer or a direct rollover. Use Form TSP-60, Request for a Transfer Into the TSP, or TSP-60-R, Request for a Roth Transfer Into the TSP.
This cannot be done with Roth IRAs.
Rollover Money You Receive into the TSP
If you receive the money from your traditional IRA or retirement plan like a 401k, and then later put it into your TSP account, this has to be done correctly. If it is not done in less than 60 days, it will not be a legal rollover, and could trigger tax consequences and penalties. Use Form TSP-60 for this. This cannot be done with any Roth funds.
Once you have set up your contribution allocations to be distributed among the funds in a certain percentage, you may decide that you want to move money between funds for many different reasons.
You may want to rebalance the funds to get them back to the specific percentages you originally were investing at. They may diverge from your contribution allocation percentage because of a difference in their growth (or lack of growth) relative to each other.
An example of this would be you have set up to invest 75% of your pay in the S fund, and 25% in the I fund.
You realize after a certain period of time, because of the way the prices of the funds have fluctuated, the S fund makes up 85% of your portfolio and the I fund makes up 15%.
You can do an interfund transfer to bring the balance back to 75% S and 25% I.
You could also decide to come up with a different strategy all together and move the funds around arranging them in any percentage you would like.
If you have traditional (including tax-exempt) and Roth money in your account, this transfer will move the money in direct proportion to how much of each type you have.
In other words, if you had 25% Roth and 75% traditional balance, that is the proportions that would be transferred. You cannot pick a proportion. It stays the same.
Limit on Interfund Transfers
Each calendar month, your first two interfund transfers can redistribute money among all your existing funds. After the first two, you may only move money into your G fund. If you have more than one TSP account, these rules apply to each account separately.
Interfund Transfers can be made on the TSP website or the ThriftLine. You will need your beneficiary participant account number (or customized user ID) and your web password for the website or PIN for the ThriftLine.
TSP Withdrawals – TSP Modernization Act
Keep in mind, the way TSP Withdrawals occur will change drastically on September 15th, 2019 as a result of the TSP Modernization Act. Essentially, much more freedom will be given to the account holder as to how and when money can be withdrawn. To help with this confusion, I’ll explain briefly what the rule used to be, and then explain what it will change to.
I put this section first because this is how the TSP was intended to be used.
Ideally, you’ve worked your full career, finished your federal service, and reached at least 59 ½ years old. If all of these are satisfied, you can start withdrawing from the TSP without penalty.
Withdrawing Roth, Traditional, or Both
Under the old system, you could not control what kind of money you were withdrawing from your TSP account. It came out of your account in the same proportion that it currently existed in your account. This is referred to as a pro rata basis.
For example, if 20% of your account is Roth TSP, and 80% is traditional, when you withdraw $1000, $200 would be a Roth withdrawal, and $800 would be a traditional withdrawal. Both are treated differently for taxes.
Under the new rule, you still have the option to withdrawal as outlined above, but now also have the option to take your withdrawal only from Roth or only from traditional.
After Service TSP Withdrawals
A partial withdrawal is exactly what it sounds like. You are not taking periodic payments (like monthly or quarterly), and you are not withdrawing your entire TSP all at once.
You are making a one-time withdrawal of a portion of your TSP balance, and leaving the rest remaining.
Under the old rule, you were limited to one partial withdrawal from the TSP in your lifetime.
Now, there is no limit to the number of partial withdrawals you can take after separating from federal service, as long as they are at least 30 days apart.
You are able to take partial withdrawals while you are receiving post-separation installment payments (covered later).
If you have taken a in-service withdrawal (covered later), it will no longer prevent you from taking post-separation partial withdrawals.
These can be done through on online wizard that will help you fill out the form on the TSP website. This applies to all withdrawal types.
Under the old system, there was a withdrawal deadline requiring that you make a full withdrawal election once you turned 70 ½ and were separated from federal service (man, I hope you are done working by that age!). Also, if you don’t withdrawal it, the TSP started an account abandonment process where they move all the money to the G fund and then ask you to withdrawal it all.
The new rule does away with this requirement. You will never be required to make a full withdrawal, and the TSP will not abandon accounts as they have in the past. You do need to start making required minimum distributions (RMD) at 70 ½. This is a minimum amount you must withdrawal each month set by tables put out by the IRS .
In-Service TSP Withdrawals
Taking an in-service withdrawal is something you should think about carefully.
This is not how the TSP was intended to be used, and for this reason, there will more than likely be some type of penalty or penalties if you take out money while you are still working and/or still under the age of 59 ½.
This is bad. Try to avoid this if possible.
Ok. Here are some of the reasons it’s bad.
When you take an in-service withdrawal, you aren’t allowed to return that money later. You miss out on the future growth that money should have had.
You may need to pay income taxes on any portion that wasn’t either a Roth contribution or qualified Roth earnings (earnings from a Roth balance that has existed for at least five years).
If you take a financial hardship withdrawal, you aren’t allowed to contribute to TSP for the next six months. You also lose the matching.
If you are married, your spouse has to consent to your withdrawal. This is true even if you are legally separated from your spouse.
Financial Hardship Withdrawal
This is an in-service withdrawal you can take before you are 59 ½ years old and while you are still employed. You can only do this based on a genuine financial need for the money.
You can get this money if you have an acceptable reason for doing so, but you will pay a 10% penalty to the IRS (think twice about this).
Acceptable Reasons for Withdrawing
- Negative Monthly Cash Flow
- Medical Expenses
- Personal Casualty Losses that you have not paid and are not covered by insurance (things that happens to houses, cars, other expensive property)
- Legal Expenses for divorce or separation from your spouse
Applying For Financial Hardship Withdrawal
Two ways to request:
- Apply online at the TSP website using the wizard, you will then mail or fax the form to the TSP
- Complete and send in Form TSP-76, Financial Hardship In-Service Withdrawal Request, to the TSP
On the withdrawal request, you have to certify under penalty of perjury that you have a genuine financial hardship based on the reasons described on this form.
No, this is not a way to invest in real estate folks!
You can do this every six months, but keep in mind the penalty discussed earlier. You cannot contribute to the TSP for six months after taking this withdrawal and you lose out on the matching as well!
This is a withdrawal you make after age 59 1/2 while you are still employed. Obviously, you pay taxes on any untaxed portion you withdrawal, unless you are able to roll into another eligible employer plan.
Under the old system, you could only make an age based service withdrawal once. Furthermore, once you made this withdrawal, you were unable to make partial withdrawals after leaving federal service.
Now, you will be able to make up to four age based withdrawals per calendar year, and doing so will not preclude you from making partial withdrawals after leaving federal service.
You can only withdraw funds you are fully vested in. This means you’ve been working long enough to keep all your matching.
How to Apply
You can either apply online at tsp.gov using the wizard or complete and send in a Form TSP-75, Age-Based In-Service Withdrawal Request, to the TSP.
Here is a chart from the TSP summarizing the differences between financial hardship and aged-based withdrawals:
An alternative to taking a in-service withdrawal, either financial hardship or age-based, is getting a TSP loan.
There are disadvantages to taking a TSP loan just like there are to taking in-service withdrawals.
I wrote a separate post on TSP Loans a while ago that covers the issue pretty well, so I won’t be rehashing it here. It has an overview of the program as well as a dive in whether or not you should do it. (Try not to)
Here’s a cool handy-dandy chart from tsp.gov on: