January: The Perfect Time to Get Acquainted with Your TSP

A new year often brings new beginnings, including career milestones like joining federal service. For new employees or anyone looking to optimize their retirement savings, January 2025 is the perfect time to take a closer look at the Thrift Savings Plan (TSP). Understanding how this employer-sponsored retirement plan works can set you on the path to financial success, whether you’re just starting your career or building toward a secure retirement.

What Is the TSP?

The Thrift Savings Plan is a defined contribution plan, similar to a 401(k) in the private sector. It serves as one of three key pillars of retirement income for federal employees, alongside a pension (depending on your system, such as FERS or BRS) and Social Security. The TSP offers low-cost investment options and powerful tax advantages, making it an essential tool for retirement planning.

Why Contribute Early?

Your TSP account balance at retirement depends on several factors: how much you contribute, how long those contributions grow with daily compounding, and the returns on your investments. Contributing early and consistently allows you to take full advantage of compound growth – where your money earns returns, and those returns generate even more earnings over time.

TSP Contributions and Matching

If you’re new to the TSP, you’re likely automatically enrolled at 5% of your salary, directed into an age-appropriate Lifecycle (L) Fund. This ensures you’re taking full advantage of the government’s matching contributions, which break down as follows:

1. Automatic 1% Contribution: Regardless of what you contribute, your agency deposits 1% of your pay.
2. Matching Contributions: You receive a dollar-for-dollar match on the first 3% of your salary and $0.50 on the dollar for the next 2%.

This match is essentially free money, but there’s a catch – contributions must be spread across the year to ensure you don’t hit the IRS limit early and miss out on matching later. The IRS elective deferral limit for 2025 is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and older.

Roth vs. Traditional Contributions

The TSP allows you to contribute on a Roth or Traditional basis, or a combination of both. Your choice depends on whether you prefer to pay taxes now (Roth) or in retirement (Traditional).

• Roth Contributions: These are made with after-tax dollars, meaning you won’t owe taxes on withdrawals in retirement, provided certain conditions are met.
• Traditional Contributions: Made pre-tax, these reduce your taxable income now but will be taxed as ordinary income when withdrawn.

Keep in mind that agency contributions are always deposited as Traditional, even if your own contributions are Roth.

Understanding TSP Investment Options

The TSP offers five core funds and Lifecycle (L) Funds, providing flexibility for all types of investors:

1. G Fund: Focused on government securities, offering stability but lower returns.
2. F Fund: Tracks the performance of a U.S. bond index.
3. C Fund: Tracks the S&P 500, representing large U.S. companies.
4. S Fund: Covers small- to mid-sized U.S. companies.
5. I Fund: Focuses on international stocks.

Lifecycle (L) Funds simplify investing by combining the core funds into portfolios aligned with your target retirement date. For example, the L 2070 Fund is ideal for younger employees aiming for long-term growth, while the L Income Fund is suited for those already in retirement. These funds automatically rebalance and adjust toward more conservative allocations as you approach your retirement target.

Making the Most of Your TSP

Here are some practical steps to help you get started or optimize your TSP participation:

1. Review Your Contributions: Check your payroll system to confirm your contribution percentage and make adjustments as needed.
2. Consider Rollovers: If you have funds in an old employer’s retirement plan, you can roll them into your TSP account for consolidation and potentially lower fees.
3. Set Up a Strategy: Use the core and L Funds to align your investments with your retirement goals. You can mix funds for a more customized portfolio.
4. Understand Fees: TSP fees are among the lowest in the industry, but it’s always good to be aware of how fees impact long-term growth. Learn more here.

Key Takeaways

Whether you’re new to federal service or revisiting your retirement strategy, the TSP is a vital asset for building financial security. Take time this January to review your contributions, understand your options, and ensure your investments are working hard for your future.