Thrift Savings Plan (TSP)

The Thrift Savings Plan (TSP) is a retirement savings and investment plan similar to an employee 401K available for federal employees and military service members. While it is true that the military retirement system is quite generous in allowing monthly retirement benefits to be paid after 20 years of service regardless of age, it may not provide you with the standard of living you desire. The Thrift Savings Plan can help by supplementing your retirement income and boosting your standard of living.

Furthermore, soldiers who separate from the military prior to 20 years can keep their TSP (although contributions can no longer be made) or roll it over into an IRA, 401K, or simply withdraw their funds (withdrawing funds prior to reaching 59 ½ years of age is subject to a 10% early withdrawal penalty).

TSP is Defined Contribution

The Thrift Savings Plan is a defined contribution plan. This means that those participating in the TSP will receive retirement income based on their accumulated contributions plus investment earnings (or losses) on those contributions. The employee is ultimately responsible for their contributions, investment decisions, and eventual gain or loss on their contributions. The military retirement pay system by contrast is defined benefit as it is a set payout based on rank and years of service.

TSP Tax Treatment

The TSP is tax deferred, meaning your contributions go from your pay directly to your TSP account before taxes are applied. Investment earnings are also tax deferred. This reduces your tax liability each year by your corresponding TSP contributions for that year. When you start to make withdrawals from your TSP in retirement, you should be in a lower tax bracket further increasing your tax advantage.

Taxes are paid upon withdrawal and contributions made while serving in a combat-zone are tax-exempt. Taxes are paid on earnings from tax-exempt contributions however.

TSP Matching Contributions

Unfortunately, matching contributions are not offered for military service members participating in the TSP. The Army implemented a pilot program of offering TSP matching contributions as an enlistment incentive from April 1, 2006 to December 31, 2008. This pilot program reported results to Congress in 2007 and is no longer offered as an enlistment incentive. For federal civilian employees, matching contributions are made dollar for dollar for the first 3 percent of contributions and 50 cents on the dollar for a further 2 percent of contributions.

Why no matching contributions for military members? This is most likely due to the military retirement system which is quite generous and considered superior to the federal employees retirement system (FERS). According to congressional aides, the Pentagon favors enlistment bonuses due to its popularity with soldiers as a recruitment and retention incentive.

TSP Contribution Limit

There are no longer contribution limits for military members except for the IRS yearly limit of $16,500 for tax-deferred accounts for 2010.

TSP Investment Options

There are several investment options to choose from when participating in the TSP.

G Fund – Invests in U.S. government securities, providing stable but low returns with virtually no risk.
F Fund – Tracks the Barclay’s Capital Aggregate Bond Index.
C Fund – Tracks the S&P 500 via BlackRock’s Equity Index Fund.
S Fund – Invests in small capitalization companies via BlackRock’s Extended Market Index Fund.
I Fund – International stock investment option that tracks the MSCI EAFE index via BlackRock’s EAFE Index Fund.

Lifecycle funds – Professionally managed funds offering a diversified portfolio consisting of the individual funds above (G, F, C, S, and I Fund). Asset allocation shifts from riskier stock investments to more stable income funds (G and F funds) as retirement approaches.
Lifecycle2040 – Retirement date of 2035 or afterwards.
Lifecycle2030 – Retirement between 2025-2034
Lifecycle2020 – Retirement between 2015-2024

TSP Loans, In-Service Withdrawals, and More

Another benefit of the TSP is the ability to borrow money from your TSP account to pay-off a car, make a down payment on a house, etc. You can also make an in-service withdrawal due to financial hardship or if you have reached age 59 ½. To learn more about these options, visit

TSP Sign Up for Military Members

Signing up for the Thrift Savings Plan is easy. Simply visit the military’s MyPay system, log-in, and visit the section on the Thrift Savings Plan.

Article Last Modified: September 14, 2010

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