One of the most common questions I get asked by military members, veterans and federal employees is, "Should I invest in the TSP?" Back when I first joined the military, I had the same question. As a new soldier in the Army I had no idea what the Thrift Savings Plan (TSP) was or if I could trust my retirement savings with the military's TSP. Luckily I had a good Senior NCO in my unit who took responsibility for talking to all the new soldiers about investing in the TSP. That at least brought it to my attention that it was an option.
In this post I will address that question the best I can by discussing what the TSP is and some of the reasons you might want to consider investing in the TSP to help prepare for retirement.
What is the TSP?
Before we get into whether or not someone should invest the TSP, it would probably be helpful to explain what the TSP is in the first place. You can also check out this blog post I wrote previously about the TSP: What You Need To Know About the TSP.
The TSP is a retirement plan for federal employees and military members. You might think of it as the federal government's version of a 401(k) plan. Through payroll deductions, you can contribute a portion of your income into the TSP and then invest that money in a variety of funds as a way to prepare for retirement. It is important to understand that the TSP, like a 401(k), is a defined contribution plan. This means that the amount of money that goes into the plan on your behalf from the government is defined by a set of rules, but the amount of money you receive in retirement is not. Don't mistake the TSP for a defined benefit plan, like the military pension or FERS (Federal Employee Retirement System). These are very different types of retirement plans.
Another important fact is that the TSP is administered by the Federal Retirement Thrift Investment Board (FRTIB). The FRTIB operates as the board of directors for the TSP. They are responsible for setting the strategy of the TSP and the oversight of the TSP. In-fact, they have to report to Congress on how the TSP is doing meeting the needs of the people it serves. In other words, you can write your representative in congress if you feel some changes need to be made to the TSP.
Are there Tax Benefits for Investing in the TSP?
Yes, there are tax benefits for investing in the TSP.
One of the most attractive reasons to invest in any employer sponsored retirement plan, including the TSP, is that you can save and invest in a tax advantaged manner. That means you pay less in taxes!
During my time in service the TSP only offered traditional tax-deferred contributions. That is to say that you would get deductions on your taxable income in the calendar year in which you made contributions, and then that money would be allowed to grow tax free until you pulled it out during retirement. When you pulled your money out in retirement it would be taxed as ordinary income. During 2012 the TSP implemented the capability for TSP participants to start making contributions into the TSP in the form of Roth contributions.
Roth contributions are the inverse of the traditional tax-deferred contributions described before. Instead of getting a deferral in the calendar year in which you make the contributions, with Roth contributions the plan participant recognizes the income as it is earned, but the money that is invested grows tax-free and is not taxed when pulled out in retirement. By adding the Roth option to the TSP the FRTIB set the TSP to be more competitive with typical 401(k) plans, which began offering Roth contributions in 2006.
Allowing military members and federal employees to choose between traditional contributions and Roth contributions sets them up for success when preparing for retirement. During years in which a plan participant believes they will have a lower marginal tax rate than during retirement they will likely save more in taxes by making Roth contributions. However, if a plan participant believes their current marginal tax rate is going to be higher than it will be during retirement they will probably be better served making traditional tax-deferred contributions. This is especially helpful when a participant knows they will be having a low tax year because of a deployment or a spouse being unemployed or underemployed. By taking advantage of these variations in effective tax rates, TSP participants can make the most of their money in the long run by reducing their lifetime tax bill.
What are the Fund Options in the TSP and are they Good?
The TSP has three broad fund categories to choose from:
- Individual TSP Funds
- Lifecycle Funds
- The Mutual Fund Window
The individual TSP funds track well recognized asset class indexes that are widely viewed as healthy components of most people's investment portfolios. The funds represent a broadly diversified set of securities which helps keep the risk profile low. Additionally, the expense ratio, or fees, for these funds are fairly competitive with what you might find at privately run financial institutions. Before the TSP started raising their fees to provide more capabilities they had among the lowest expense ratios I could find. However, the TSP is now less price competitive than some of the larger financial institution's fund offerings. AKA, you can do marginally better on costs outside the TSP.
The TSP also offers Lifecycle Funds. Lifecycle funds, sometimes referred to as "target date funds", seek to handle asset allocation on the investor's behalf. This can be a big convenience for the often busy military member, veteran or government employee who doesn't have much time or bandwidth to check in on their portfolio every year. General investment wisdom is that as a person gets closer to retirement they should shift their asset allocation gradually towards a little more fixed income and a little less equity. The underlying assumption is that fixed income investments are less volatile and therefore "safer" for people when they need to rely on withdrawals from their portfolio to meet their living expenses needs (although this doesn't necessarily hold up during times of big interest rate swings). The TSP is somewhat more conservative with their asset allocation than what I have found at other organizations. They put a slightly higher allocation towards fixed income. So to make an apple's-to-apple's comparison with funds at other institutions you might need to do a little digging to find out which funds have a similar asset allocation. Even though the target retirement date may be the same the investment mix likely won't be.
Lastly, the TSP decided to offer something called The Mutual Fund Window to its participants. Personally, I have never used the mutual fund window and the reason is because it is expensive. For the privilege of utilizing the mutual fund window you will be required to pay $150 in annual fees and $28.75 every time you make a trade inside your account (as of calendar year 2025). This is in addition to whatever the fees are associated with the investment you choose. These transaction fees are much higher than the typical market rate at other financial institutions and begs the question why you wouldn't just pursue investing in a mutual fund or ETF through other means. I find it hard to justify this option for the average person based on cost alone. Additionally, the TSP has mandated that no more than 25% of your account balance can be invested through the mutual fund window which makes utilizing it that much more cumbersome. They also have account minimum requirements to qualify for the Mutual Fund Window. Taken together, the costs associated with this option and the limits that have been put in place make it appear like an awful option.
My assessment is that the individual funds and the lifecycle funds are good options for most people but not so for the mutual fund window on the basis of the high expenses you will likely pay and rigid utilization rules.
The Rule of 55
One unique advantage of the TSP is that participants may be able to access their funds earlier than they might in other types of retirement accounts. However, this rule only applies to people who leave federal service on or after their 55th birthday. In other words, this won't apply to most veterans unless they happen to make their second career one that is also in the federal government. This is particularly helpful if you joined the military at 18, did 20 years of service and then immediately transitioned to 20 years of service working for a federal agency. That would land you at 58 years of age and a full year and a half before you would be allowed to access a typical retirement account. This advantage is not one to be overlooked when deciding if you should invest in the TSP.
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Disclaimer: This blog post is intended for educational purposes only, it should not be construed as tax advice or financial planning advice. Consult a professional for tax and financial planning advice before making any changes. All photos are from open source domains.