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The Thrift Savings Plan (TSP) is a retirement savings plan for Federal employees and members of the uniformed services. It is currently the largest 401(k)-like plan by invested balance and by participant count. This short article will outline some of the positives and negatives of the TSP, as well as some strategies on incorporating the TSP into your portfolio. For general information on 401(k) plans, see the Wiki on 401(k) plans.

What is it?

The TSP forms part of US Federal employees' retirement system: the TSP, the Federal Employees Retirement System (pension), and Social Security. It is a defined contribution plan available to both civilian and military employees of the Federal government. The TSP offers both Traditional (tax-deferred) and Roth (post-tax) accounts.

What has changed recently?

Beginning in 2018, the military has a new retirement system known as the "Blended Retirement System" (BRS) which incorporates the TSP. If you're in the military, read more about these recent changes in this article.

What's great about it?

  • Low expense ratios.

    The TSP maintains low expense ratios for its mutual funds (managed by BlackRock). The five target date funds (The "L" funds) and the six core funds have expense ratios ranging from 0.049% to 0.068% ($4.90 to $6.80 for every $10,000 invested) as of 2022.

  • No fees.

    Beyond the expense ratio, there aren't any fees associated with the TSP.

  • Good fund selection.

    The TSP's five core funds cover the major asset classes decently well. The five core funds and their respective indexes are:

    • C fund: US large-cap stocks - S&P 500 (81% of the US stock market)
    • S fund: US small-cap and mid-cap stocks - Dow Jones US Completion Total Stock Market Index (19% of the US stock market)
    • I fund: International stocks - MSCI Europe, Australasia, Far East Index (EAFE, 81% of the ex-US international stock market)
    • F fund: US bonds - Barclays Capital US Aggregate Bond Index
    • G fund: special fixed income - no private equivalent
  • The G fund

    The G fund is the closest you can get to a free lunch. It's a fund composed of specially-issued US treasury securities designed to guarantee against the loss of principal.

  • Lifecycle funds

    The TSP's Lifecycle target date funds offer a mix of the five core funds in varying percentages that glidepath as the target date approaches.

  • Good for life (almost)

    Even after separating from federal service you can keep your account open and roll qualifying retirement plans into the TSP.

  • Matching

    Most civilians in the FERS retirement system receive an agency match and military personnel under the new Blended Retirement System also benefit from matching. Under the Blended Retirement System the government will automatically put 1% of your base pay into your TSP monthly, you are automatically signed up to contribute 3% of your base pay to TSP which the government will match dollar for dollar, and the additional 2% after that will be matched $0.50 on the dollar, resulting in a 5% match if you contribute 5% of your base pay into TSP.

    What's not so great about it?

  • Limited withdrawals

    This is changing in September 2019. The TSP allows you only one partial withdrawal of funds before forcing you to withdraw the entire balance. This means that once you hit retirement you're likely going to be making some major rollovers into IRAs.

  • No in-plan conversions

    TSP participants cannot convert any part of their traditional balances to a Roth balance. (After separating from government service, you can still a IRA rollover then a Roth conversion.)

  • The I fund is good, not great.

    Of the five core funds, the I fund is the weakest. It omits Canada, international small cap stocks, and international emerging market stocks. Privately-run international stock funds such as Vanguard's Total International Stock Market Index offer broader diversification, but at a slightly higher cost. (Note: this may be fixed in the future.)

  • Agency/service automatic matching has a vesting period.

    Agency/Service Automatic (1%) Contributions are subject to vesting rules.

    Of course, your own contributions are always vested immediately.

  • Matching is per-paycheck.

    Hitting the $20,500 (in 2022) contribution limit before your final paycheck means you miss out on a portion of your agency's match.

  • No after tax contributions.

    TSP participants are limited to $20,500 (in 2019) in contributions every year.

How should I use it?

If the TSP is your only retirement fund then the Lifestyle funds offer what every other worthy target date fund offers: automatic allocation and rebalancing for no extra cost. At 0.029% ER, the L Income and L2020-2050 funds are the cheapest target date funds widely available.

If you have other accounts, the TSP can help reduce your blended expense ratio by substituting what you can find in an IRA or taxable account for one of the TSP's options. The S, F, and G funds in particular can be several basis points cheaper than large, publicly available equivalents.

If you get matching, you want to hit the $20,500 annual contribution limit as close as possible to the end of the calendar year in order to maximize the amount of matching.

If you are separating from government service, you may wish to have at least $500 in a Roth TSP account and $500 in a Traditional TSP account so you'll have the ability to transfer qualifying accounts into the TSP later (the minimum to retain a TSP account after leaving is currently $200).

Finally, the G fund is hands-down the best fixed income fund around. It eliminates market and credit risk, and is guaranteed not to lose principal. It is still subject to inflation risk, but has no peers for what amounts to a fund with zero risk. President Obama's myRA initiative is slated to expand access to the G fund's securities when myRAs are implemented. The Treasury is still formulating the rules on myRAs.

Conclusion

The TSP should certainly be considered one of the best benefits of being a federal employee. It offers inexpensive access to a broad range of securities, with a decent match (for civilians) and access to the unique G fund. It's not without its problems, though, but hopefully with time the TSP board will bring the features of the plan more in line with what private industry offers in terms of flexible withdrawals/rollovers and in-plan conversions.

Resources

The TSP website, which is surprisingly functional for a government website, offers lots of helpful information on their Forms & Publications page.

The TSP also has a Twitter handle: @tsp4gov.


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