What Is a Thrift Savings Plan?

The Federal Employees' Retirement Security Act of 1986 established the Thrift Savings Plan, or TSP. It is a qualified retirement plan for federal employees and members of the uniformed services. The Thrift Savings Plan is a defined contribution plan similar to a 401(k), which is a plan offered by companies in the private sector.

Understanding a Thrift Savings Plan

The Thrift Savings Plan was introduced in 1986 through the Federal Employees Retirement System Act. A TSP allows federal workers to invest in a tax-advantaged retirement account. Much like an IRA, there are traditional TSPs, in which money is taxed when you withdraw it, and Roth TSPs, where you pay taxes on contributions but the earnings are tax-free.

Unlike IRAs, the contribution limits are quite a bit higher. In 2023, you can deposit $22,500 to a TSP (increasing to $23,000 in 2024), unless you're 50 and over, in which case the limit is $30,000 in 2023 (increasing to $30,500 in 2024).

If you are part of the Federal Employee Retirement System (FERS) or the Blended Retirement System (BRS), your agency may match your contributions. Most agencies automatically contribute 1% of your salary to a TSP and an additional 4% after two years of service.

Investing in a TSP

The Thrift Savings Plan accepts rollovers from previous retirement plans such as an old 401(k) or IRA. Likewise, if a participant terminates employment and goes to work in the private sector, the Thrift Savings Plan account can either remain intact or be rolled over into the new employer's plan or to a traditional IRA.

Although the Thrift Savings Plan is limited in its available investment options, it does offer a low-cost way for government workers to save efficiently for retirement. As with other qualified retirement plans, the participant can choose and allocate any percentage of their assets into any desired funds.

The available funds are below.

Individual Funds

• The G fund, which invests in government securities, such as Treasuries
• The F fund, which invests in corporate and government bonds
• The C fund, an index fund representing the S&P 500
• The S fund, a small-cap stock index fund—riskier than the C fund, with higher potential gains
• The I fund, an international stock index fund that mirrors the MSCI EAFE Index—the riskiest individual fund, with the highest potential assets

Lifecycle Fund

A sixth choice is to invest in the Lifecycle Fund, containing a percentage of all five individual funds. As the Lifecycle Fund approaches maturity, the funds in the portfolio are rebalanced towards less risky assets.

The Bottom Line

A Thrift Savings Plan is a major compensation for employees of the federal government and armed services. Not only does it provide a tax-advantaged form of retirement savings, but the government will also match employees' contributions to help them save for retirement. As with other retirement plans, the most important thing is to start early.