Understanding your TSP Investment Options
Federal employees enjoy some of the strongest benefits packages available today. In addition to your FERS pension and excellent health insurance, you also have the ability to invest through the Thrift Savings Plan (TSP)—your primary vehicle for building long-term retirement wealth.
Whether you’re new to federal service or have been contributing for years, it’s important to understand how your TSP works and how to invest your money in a way that aligns with your goals. Here’s what you need to know.
TSP Basics
When you start your first eligible federal job, you’re automatically enrolled in the TSP with contributions directed into your account each pay period. This ensures you receive the valuable agency matching contributions, which continue as long as you contribute at least enough to receive the full match.
Your TSP operates similarly to a private-sector 401(k). Key features include:
- Traditional and Roth Options: You choose whether contributions are tax-deferred (Traditional) or after-tax (Roth).
- Annual Contribution Limits: The IRS sets annual contribution and catch-up limits, and these typically increase over time. You can update your withholding at any point to reach the maximum or contribute more strategically.
- Agency Match: Eligible employees receive matching contributions from their agency, one of the most valuable long-term benefits of federal service.
- Withdrawal Rules: You can access funds penalty-free beginning at age 59½, or earlier if you separate from service in the year you turn 55 (or 50 for certain public safety employees).
- Required Minimum Distributions: RMDs begin at the age set by current IRS rules, which may adjust over time.
These rules may evolve, but the structure of the TSP remains consistent.
TSP Investment Options
One way in which the TSP differs from a 401(k) or IRA is the way in which you can invest your money. Instead of having unlimited mutual funds and investment vehicles to choose from, this government-sponsored plan has just five individual funds to choose from and several L Funds.
C Fund
The C Fund is the Common Stock Index Investment Fund, which is an index fund designed to match the performance of the S&P 500. This means that when the 500 companies in the S&P 500 do well, your investment gains money. You may also lose money if this index drops in value. Investing in the stock market always comes with some risk, though this fund’s focus on well-established U.S. companies mitigates that risk somewhat. The C Fund is considered a medium risk investment.
S Fund
The S Fund is the Small Cap Stock Index Investment Fund, which tracks the performance of the Dow Jones Industrial Average. This fund covers a broader range of domestic stocks, so while the fund is well-diversified, it also comes with greater risk. The S Fund is considered a medium-high risk investment.
I Fund
The I Fund the International Stock Index Investment Fund, which consists of stocks from Europe, Australasia, and the Far East. Investing in international stocks adds plenty of diversity to your portfolio, but also greater volatility. The I Fund is considered a high risk investment.
F Fund
The F Fund is the Fixed Income Index Investment Fund, which is a bond fund. Because bonds are generally backed by government entities, they are much safer investments. You won’t generally lose money in bonds, though the rate of return is often lower than the rate of return in the stock market. The F Fund is considered a low-medium risk investment.
G Fund
The G Fund is the Government Securities Investment Fund, which invests in short-term U.S. Treasury securities. Because these bonds are backed by the U.S. government, they are a very safe investment. When interest rates are low, the rate of return isn’t great, but it’s very reliable. The G Fund is considered a low risk investment.
L Funds
The L Funds are Lifecycle Funds that are designed to take the guesswork out of investing. These funds automatically divide your contributions among the five funds listed above, allocating your investment in a way that makes sense for your age. You simply choose the fund with the year closest to your target retirement rate, and the fund manager adjusts your allocations so that the fund becomes less risky as you age.
Choosing Your Allocations
New TSP participants are typically enrolled in a Lifecycle Fund by default. But you always have the option to create your own mix from the five individual funds.
As you choose your allocations, consider:
- Your investment time horizon
- Your comfort with market volatility
- Whether you prefer a hands-off or hands-on investing style
- How your TSP fits into your broader retirement strategy, including your FERS annuity and Social Security
Younger investors often choose a more stock-heavy structure for long-term growth, while those nearing retirement gradually shift toward bonds or conservative L Funds to reduce risk.
Your allocations can be changed at any time, allowing you to adapt as your goals or circumstances evolve.
We Can Help Build a TSP Strategy That Fits You
Your TSP is one of the most important components of your retirement plan. Making smart, intentional decisions about your contributions and allocations can significantly impact what your retirement looks like years from now.
If you’d like help evaluating your options or building a TSP strategy that aligns with your goals, we’re here to help. Contact us today to get started.