I've been asked to write a post about the Thrift Savings Plan (TSP), so this will be a bit of a back to basics post for those who are eligible for it. This was originally written in 2017, but updated now for 2020.
The Thrift Savings Plan is basically the 401(k) for federal employees including military members. There is no profit-sharing component to it, so the employee is generally limited to a $19,500 per year employee contribution ($26,000 per year if 50 or over) plus any match she may qualify for.
Roth Option in the Thrift Savings Plan
When I was in the military, there was no Roth TSP option, but there now is. While most people should probably use a tax-deferred option instead of a Roth option during their peak earnings years, that is not the case for most TSP-eligible folks. Those in the military are probably in a ridiculously low tax bracket (thanks to low pay, probably no state taxes, and a large percentage of their income from non-taxable allowances and tax-exempt war zone pay) now, so they should generally use the Roth option. In addition, many military and federal workers will have a pension in retirement and the more taxable income you will have in retirement filling the brackets, the better Roth retirement account contributions become.
TSP Match
Non-military members have received a TSP match for a long-time, but military members starting in 2018 also receive a match on up to 5% of base pay. That's part of your salary, don't leave it on the table. With the new “blended retirement system” (automatic for those entering the military after Jan 1, 2018, and optional for those already in the military) military members will get the same match as federal workers along with significant changes to the pension system. Those changes are much better for those who don't stay in 20 years since the pension previously had “cliff vesting” and the Thrift Savings Plan had no match.
Why The Thrift Savings Plan Rocks
The TSP may be the best 401(k) in the country. It has rock bottom expense ratios (people are literally complaining that the ERs have gone up in recent years from 2.5 basis points to 4.1 basis points), broadly diversified index funds, and simple “Lifecycle” (like Vanguard Target Retirement) funds. In addition, it has the unique G Fund, which offers treasury bond yields with the safety of a treasury money market fund. I've written about that free lunch before. There are no additional fees.
The TSP is such a great 401(k), that savvy folks don't roll their money out of it when they leave the military. Instead, they keep it open and roll money into it at every opportunity.
The TSP Funds
There are five basic funds in the TSP:
- C (“Common Stock”) Fund: Basically a very low-cost S&P 500 index fund
- S (“Small Stock”) Fund: An extended market index fund, mostly mid-caps despite the name
- I (International Stock) Fund: A developed market index fund- Europe and Pacific, but no emerging markets (a recent change to add them was squashed due to concerns about the government endorsing the investment of money into Chinese companies)
- F (Fixed Income) Fund: A total bond market index fund
- G (Government Securities) Fund: A unique fund similar to a stable value fund, but backed by the US government instead of an insurance company. As of Dec 2019, it was paying 1.875%. Not awesome, but better than the Vanguard Prime MMF paying 1.71% and the Vanguard Intermediate Treasury Fund paying 1.74%.
In addition to these basic funds, there are also LifeCycle Funds, one for every ten years. The idea is that you pick your retirement date and put all your money in that fund. The asset allocations of these funds in May 2017 were:
- L (LifeCycle) Income: 11% C, 3% S, 6% I, 6% F, and 74% G
- L (LifeCycle) 2020: 22% C, 6% S, 12% I, 6% F, and 54% G
- L (LifeCycle) 2030: 34% C, 10% S, 19% I, 6% F, 31% G
- L (LifeCycle) 2040: 39% C, 12% S, 22% I, 6% F, 21% G
- L (LifeCycle) 2050: 44% C, 14% S, 25% I, 5% F, 12% G
Like with any retirement date fund, you should pick your fund by the desired asset allocation, rather than the date. Bear in mind these asset allocations are significantly less aggressive than what Vanguard puts in their Target Retirement funds. That's not necessarily good or bad, just different so be aware of that.
Thrift Savings Plan Tax-exempt Contributions
Military members can contribute additional money (usually $57K – the $19.5K employee contribution minus any match received) in after-tax money into the TSP while they are deployed. This is not necessarily the best move given that earnings on that money remains tax-deferred. But if you can figure out a way to get that tax-exempt money into a Roth account, then it is a great idea. Unfortunately, in-plan conversions are not currently allowed.
The Downsides of the TSP
The TSP has been legitimately criticized as well (and for more than just raising ERs by 1 basis point.) Here are the problems I see with the TSP:
# 1 S&P 500 instead of Total Stock Market
Total stock market (TSM) funds are slightly better than S&P 500 funds. Not only are they more diversified, but nobody can front-run them. Together with the inclusion of theoretically higher returning small stocks, TSM should have slightly higher returns.
# 2 No True Small Stock Fund
An extended market fund is a poor substitution for a small stock fund. It's 53% mid-caps according to the Morningstar Instant X-Ray Tool. Of course, that's not all that different from the Vanguard small cap index fund which is now up to 59% mid-caps! If you want a small-cap fund that is mostly small caps on a Morningstar X-ray you pretty much have to buy a microcap fund. But it demonstrates the importance of looking under the hood before you buy.
# 3 Simplicity vs Diversification
The TSP is traditionally very slow to add any additional asset classes. So one big criticism that many have of it is that you can't buy Emerging Market Stocks, Foreign Bonds, REITs, TIPS, Small Value funds, Gold, etc. Again, that's not necessarily a bad thing since simplicity helps lots of people avoid dumb mistakes AND keeps costs low. But it forces asset class junkies like myself to build around what the TSP has using Roth IRAs or a taxable account.
# 4 Only One Partial Withdrawal
For a long time, the biggest problems with the TSP, aside from the fact that you have to deal with government bureaucracy and military finance offices when using it, were all related to getting your money out of the account. For example, you could only do one partial withdrawal from the TSP IN YOUR ENTIRE LIFE! I'm not talking about while you're employed (you can't do one then). I'm talking about after you separate from service. I had to use mine to get my tax-exempt money out into a Roth IRA. But the next time I want to roll money out of the TSP, I would have had to take it all out. They would let you do as many rollovers into the TSP as you like, but it was a lot harder to get your money out.
Thankfully, this has dramatically improved since I wrote this post. There are both hardship-based and age-based in-service withdrawals, but more importantly, a lot more options for when you leave federal service.
# 5 Limited Distribution Options
Speaking of getting your money out, another big issue is when it comes time to spend your money in retirement. You used to have just five options:
- Leave the money in the TSP and just take your RMDs.
- Take it all out- either pull it out and pay the taxes (and possibly penalties) on it and put it in a taxable account or roll the entire thing into an IRA or 401(k).
- Take out a specific dollar amount every month until the money is gone. This amount must be at least $25.
- Take out an amount each month calculated based on your life expectancy. This is not technically an annuity (i.e. no guarantee the payments won't go down over time with poor investment performance) and the amount you get is recalculated each year.
- Annuitize the account. The annuity can be single, joint, with 100% or 50% to the survivor, and can be flat payments or indexed to inflation.
You could also do various combinations of the last four options. i.e. you could annuitize half of it and roll the other half into an IRA.
But now you can also take out “single withdrawals” of $1,000 or more as often as you like. This is much more like a typical IRA or 401(k).
# 6 No Mega Backdoor Roth IRA Option
There are no real in-service withdrawal or in-plan conversion options and the only time you can put in after-tax money is while deployed. Most 401(k)s don't offer these, but some do!
Loans and Hardship Withdrawals
Like many 401(k)s, the TSP also offers loans and hardship withdrawals. Obviously, try not to. Neither are great options for extra cash. Loans must be repaid upon separation (or it triggers taxes and penalties) and hardship withdrawals may still cause penalties to be assessed (along with the expected taxes.) Either way, it's certainly going to impede the long-term growth of the account.
Summary
In summary, the Thrift Savings Plan is a great 401(k) and you should feel lucky to have access to it. It does, however, have a few quirks you should be aware of. Hopefully, it will continue to improve as the years go by.
What do you think? Do you have access to the TSP? How do you use it and why? What do you like and dislike about it? Comment below!
You mentioned that the Lifecycle funds are significantly less aggressive than others. How would you suggest changing the allocation to make it more aggressive? I’m currently 29 and maxing out TSP. I’m currently 100% in L2050 but considering re-allocating the funds. Thank you!
How do you get more aggressive? More stocks and less bonds. For instance, you could go 80% L2050 and 20% S or something. That would be more aggressive.
Any particular reason you want to be more aggressive? Do you disagree with the L Fund designers for some reason and agree more with another lifecycle fund provider’s asset allocation for some reason?
I disagree with the L fund designers on going bond heavy nearing retirement and then staying bond heavy for the rest of your life.
I believe it was Wade Pfau who published an alternative approach of going bond heavy nearing retirement age and for the first few years into retirement to reduce sequence of returns risk, then gradually ramping up equity exposure later in retirement to reduce longevity risk and potentially increase funds for surviving spouse and heirs. The three to five years immediately before retirement and the first 3-5 years after retirement were the greatest risk for SORR.
Then again, I hardly can fault the L fund designers. I’m not aware of another lifecycle fun that ramps equity exposure back up, even mildly, as the retiree ages.
To be fair, Wade published that data long after the L Funds (or other lifecycle funds) were designed.
The max with catchup contributions was lites as $25,500 on the email that went out and I believe on the website about four hours ago. (Please feel free to delete this comment.)
That’s weird, I updated it hours before it was supposed to go out. Oh well.
I joined the Air Guard three years ago. My private practice took off this year & my husband manages it. Our gross take home (between W-2 & owner draw from our S-Corp + $50,000 officer bonus + ~$7700 Guard salary & $9600 non taxable Foster care income) is about $270,000. Were still paying down a lot of debt from a prior practice so I haven’t started a 401k in my private practice yet. I’m just maxing out my TSP ($19,000 + matching, thanks to the officer bonus!) and our Roth IRAs (through the back door option). Should I be putting the TSP money into the Roth or Traditional? And as things continue to pick up & we pay down our higher percentage debts (4-5%-Nothing huge, just personal loans & mortgages) any recommendations on what to do for the next level of investing for retirement-start the office 401k??? We just turned 41yo.
Depends, but in general during peak earnings years the rule of thumb is to use tax deferred accounts.
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
A 401(k) for your practice is a good idea, but you also have to provide it to employees which might make it less attractive for you.You can always invest in a taxable account.
Might want to update the first paragraph. The catch up contribution for those who’ll be 50 or older at some point this year went up to $6,500. Total employee contributions for age 50+ is $26,000 for the year, or an even $1,000 per pay period for VA and other civil service TSP participants. (Set $2,667 per month for older military docs.)
What are you talking about? The first paragraph says:’
I’ve been asked to write a post about the Thrift Savings Plan (TSP), so this will be a bit of a back to basics post for those who are eligible for it. This was originally written in 2017, but updated now for 2020.
The second paragraph says:
The Thrift Savings Plan is basically the 401(k) for federal employees including military members. There is no profit-sharing component to it, so the employee is generally limited to a $19,500 per year employee contribution ($26,000 per year if 50 or over) plus any match she may qualify for.
What’s wrong there? $26K – $19.5K = $6500.
I am an associate orthodontist making 325k a year and also in the guard with an income of approximately 35k (drill pay 10k +25k bonus). For 2019 as an associate I will have a work 401k with 3% match. In 2020 I will no longer have a 401k option. My question is how can I maximize contributions in 2019 and moving forward in 2020. I am unclear on how much I can contribute to TSP, IRA and 401k in 2019 and 2020. Can I max TSP and IRA in 2020 (married filing jointly, wife doesn’t have income). Thanks for the help!
For 2020 you should be able to put in $19.5K plus the match into the TSP, $6K into a Backdoor Roth IRA and nothing into your 401k.
For 2019 you should be able to put $6K into a Backdoor Roth IRA, a total of $19.5K as an employee contribution into the TSP and 401(k), plus any matches you can get. The best move is likely to split your employee contribution between the two plans in the way that gets you the most matching dollars.
Thanks for the reply…I opted for the standard retirement (8 yrs left so standard retirement seemed better) so my only match for 2019 is my 401k through employer so I maxed it and did not contribute to TSP or IRA.
So are you saying that I can max the 401k and also contribute to IRA for myself and wife in 2019 (so $12K for myself and spouse for 2019 and 2020?) I thought I couldn’t do a 401k and IRA ($19.5K+$12K). Also is it better to do a normal IRA vs Roth IRA due to my higher tax bracket now?
You can do both a 401(k) and an IRA in the same year, yes.
You likely have to do a Roth IRA via the Backdoor Roth IRA process if you have a high income.
Currently active duty, separating from the service in June 2020 as my obligation is over then. I will begin a fellowship in July. My overall income for 2020 is therefore projected to be lower (gross ~ $135K) – which may be in the neighborhood of some deductions?
1. should i continue to max out the TSP for 2020 within these first 5 months before i exit the service? (which requires half of my base pay, a somewhat significant sum)
2. If so, should I toss into the Trad vs Roth for deduction purposes? I have been using mostly the Roth option for years (one must use a minority of Trad for matching purposes).
3. Does this play a role in me rolling over ~$46K from a civilian Trad IRA into a Roth during 2020? In other words, should i use the Trad for TSP in order to have a lower income and therefore less tax penalty for the rollover?
4. Once out of the service, I am playing with the idea of pulling all funds from the TSP into another entity, but not sure what. Should I wait for a group 401k? 403b? should i create my own 401k? just leave it in the TSP for now?
Many thanks!
1) Sure, if you can.
2) I’d do Roth.
3) I’d do that too in addition to Roth contributions.
4) Mine is still in the TSP and I’ve been out since 2010. It’s only become a better option in those years.
Don’t pull everything out of the TSP. Keep some money in the TSP, perhaps $5K, do you have the option to roll money into the TSP in the future if you want to.
The G fund is nice as government bonds go.
Am I allowed to roll money into the TSP after I separate from service?
If so from what kind of accounts?
Adam
Yes.
IRAs, SEP-IRAs, 401(k)s, 403(b)s, governmental 457s, defined benefit cash balance plans etc.
First off great website and articles. I think I’ve learned more reading your articles in the past few months than attempting to Google everything.
My background in short. I’m a state law enforcement officer and enlisted in the Air Guard. Yearly pay is $120k plus Guard ($6k). I have a wife and two children. All stay at home. My motivation is my family and to ensure their future. Aside from our mortgage we have zero debt. No credit card, school, car etc.
I invest in our State Deferred Compensation 457 plan, 10% Pre Tax and 18% Roth. It’ll max out by Aug/Sept.
I never participated in TSP or opted for the new Blended Retirement System with matching. Always a little skeptical of how policies seem to change daily. After reading more and having time to research it seems like a mistake to have not taken advantage.
1. Do you think traditional TSP (no matching) is still worthwhile? I can eventually put VA Disability funds into TSP if I’m not mistaken.
2. Maybe naive but can I contribute to both a 457 and TSP while maxing out both funds at the current $19,500 contribution limit?
3. We are also considering a solo 401k under an LLC in my wife’s name as an additional means of investing.
Do you have any other recommendations? Thank you
David
1. Sure. Why not?
2. Yes.
3. Why not if your wife has self employment income?
You can do Roth IRAs too, through the Back Door if necessary.
2. Perfect so both TSP and Def Comp can each be maxed out yearly each at $19,500 for a total of $39,000?
David
Yes.
Any thoughts on maintaining 20% in TSP G Fund vs. splitting 10% G Fund and 10% Vanguard Inflation-Protected Securities Fund. I realize you don’t have the option these days, but if you did would you maintain your current bonds/securities allocation? It appears both options are reasonable? Thank you for what you do.
Yes, both are reasonable. I prefer an even split so that’s what I have.
Thanks for the post! I’ve got a question for you:
I got out of AD 3 years ago and joined the ANG. I am able to contribute to an employer 401K. As a part owner, I have the ability to contribute up to 56k annually through profit sharing (19k personal contribution, employer match (me), and profit sharing making up the rest). I’m not quite yet earning enough to get the full 56k (contributed about 50k this year).
Since I am still in the military, in the ANG, I also have access to contributing to the TSP for the next few years until I retire (I contributed yearly while in AD). It is my understanding that if I contribute to the TSP as well as my 401K and exceed the maximum allowable contributions, I will have to pay taxes on the amount over my investment amount. (I would assume that would be taxes on anything in the TSP since I’m contributing the full 19k through my day job).
My question: if you, James, still had access to the TSP, would you stuff additional after-tax money into that as a low-cost investment or seek out other investment opportunities?
Thanks
Came to note that many veterans are not retirees, saw the age of the posts, and first looked for my prior comments!
Rare issue in our group, but veterans’ benefits for nonretirees are, as I advised spouse (I never applied, he wants me to, but don’t think I’d top 30% to actually get any payment) when he applied, health insurance for all your service connected issues in case your issues prevented you from getting other insurance back with preexisting conditions. Also over all health care if you are actually indigent.
Just wish I’d qualified for GI bill 3 decades ago- we had TWO kids, and benefits can be used for grad school!
Hello
I just wanted to confirm that there are no other retirement funds available working for the veteran’s affair other than TSP? I am trying to ask the VA directly but so far it looks like just TSP?
No 403b or 457b I assume
No, I don’t think there is a 403b or 457b. You know about the pension though right?
https://www.opm.gov/retirement-services/fers-information/
FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). Two of the three parts of FERS (Social Security and the TSP) can go with you to your next job if you leave the Federal Government before retirement. The Basic Benefit and Social Security parts of FERS require you to pay your share each pay period. Your agency withholds the cost of the Basic Benefit and Social Security from your pay as payroll deductions. Your agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life.
The TSP part of FERS is an account that your agency automatically sets up for you. Each pay period your agency deposits into your account amount equal to 1% of the basic pay you earn for the pay period. You can also make your own contributions to your TSP account and your agency will also make a matching contribution. These contributions are tax-deferred. The Thrift Savings Plan is administered by the Federal Retirement Thrift Investment Board.
WCI,
Long time reader, first time poster. Wondering your opinion about my situation. Prior University of California employee (with 403b, 457, and DCP accounts), now working for VA (so TSP). Should I keep prior funds in the respective accounts at UC, roll them into a combined account at UC, or roll over into TSP?
Thanks,
Jeremy
I’d roll it all into the TSP personally. I like the TSP.
Apologize if this is answered somewhere but I have about 50% of my TSP in a tax-deferred status. Does it make sense to roll that over to a Roth and pay taxes now or just pay the taxes when I’m retired and utilizing it? My assumption is to roll over now but I don’t know what the taxes would be on about $200,000? We plan to retire in California so may be best to do now.
It’s a complicated question with a complicated answer.
https://www.whitecoatinvestor.com/roth-conversions/
https://www.whitecoatinvestor.com/roth-conversions-and-contributions-principles/
It also requires your money to leave the TSP.
The fact that you’re moving to a high tax state does make it more likely that a conversion now of some size may make sense.
Hello
I had a question about 401k and TSP
1) If I have a TSP and I get a 5% match saying for working for the federal government. Lets say I also have a side business doing telemedicine and get a 1099. Is it better to put money into the employee contribution solo 401k if I am self employed since I skip that 7.5% tax by putting money into the pretax 401k or better to contribute to the TSP account instead of the solo 401k?
2) I do telemedicine and locums as well (different year that I am not working for the feds). Are those considered two separate income streams as a sole proprietor since they are with different companies? I am wondering if I can create a 401k for both of them but not sure how that is perceived in the eyes of the federal government
3) If telemedicine in state (no taxes where I live) and out of state locums(state with income taxes) are both considered part of the same entity and not eligible for separate solo 401ks then how does the IRS know where I am putting the money in from (instate telemedicine vs out of state locums)? For example I work part of the year in state (telemedicine no state income taxes) and part of the year out of state (income taxes).
Sorry this was very confusing for me.