If you joined the service after January 1, 2018, you are automatically enrolled in the Blended Retirement System (BRS), which includes the Thrift Savings Plan (TSP). If you joined the service prior to January 1, 2018, then you must elect to participate in the TSP. This valuable benefit allows you to maximize free money you could be getting through the TSP.
What Is a TSP Account?
The Thrift Savings Plan is a retirement savings and investment plan offered to federal employees and members of the military. It’s similar to a 401(k) plan and allows participants to save for retirement through contributions from their paychecks, which can be tax-deferred (traditional TSP) or tax-exempt (Roth TSP).
When managing a TSP account, participants should be aware of the matching contributions offered by the federal government (for those eligible), as maximizing these can boost your retirement savings. It is also important to consider factors such as contribution limits, which are subject to annual caps set by the IRS.
Different Types of TSP Accounts: Traditional vs. Roth
The primary difference between traditional and Roth TSP accounts lies in how and when your contributions and earnings are taxed.
With a traditional TSP, contributions are made on a pre-tax basis, which means they reduce taxable income in the year they’re made, providing an immediate tax benefit. The money in the account, including any investment earnings, then grows tax-deferred.
Taxes are only paid when the funds are withdrawn in retirement, at which point they’re taxed as ordinary income. This can be beneficial for individuals who expect to be in a lower tax bracket during retirement or who want the immediate tax reduction now to increase their take-home pay or allocate funds elsewhere.
In contrast, a Roth TSP is funded with after-tax dollars, which means that contributions to your retirement account will not reduce your taxable income when made. However, the benefit is that when you retire, your withdrawals, including any earnings, will be tax-free, as long as certain conditions are met (i.e., the account is at least five years old and the participant is at least 59-and-a-half years old).
This option may be advantageous for those who anticipate being in a higher tax bracket in retirement or who prefer to pay taxes upfront and enjoy tax-free growth and withdrawals later.
Some participants may choose to contribute to both a traditional and a Roth TSP to diversify their tax strategy and provide more flexibility in retirement. This approach, known as tax diversification, can help hedge against future changes in tax laws or unexpected income variations in retirement.
TSP Contribution Limits and Matching
The annual contribution limits for TSP accounts are set by the IRS. If you have both a traditional and a Roth TSP, then the limits apply to the combined total of contributions.
For 2025, the contribution limit was $23,500 for regular contributions. Participants aged 50 or older are also eligible for catch-up contributions, allowing them to contribute an additional $7,500 per year, bringing their total annual contribution limit to $31,000.
For Federal Employees Retirement System (FERS) participants, the federal government offers a matching contribution program, which is an excellent way to accelerate TSP growth. The government will automatically contribute an amount equal to 1% of the employee’s basic pay, regardless of whether the employee makes contributions.
- The first 3% of the employee's contributions are matched dollar for dollar.
- The next 2% is matched at 50 cents on the dollar.
This means that if employees contribute 5% of their basic pay, they receive the maximum employer match of an additional 4%.
Benefits of a TSP
The main benefits of contributing to a TSP account are: tax advantages, compounding growth, and the stability of a government-sponsored investment plan.
Both traditional and Roth TSP options offer tax benefits, whether they reduce your taxable income now (traditional) or offer tax-free withdrawals in the future (Roth).
TSP contributions also benefit from compounding growth, which is the process of earning returns not only on the initial investment but also on the accumulated interest and earnings over time.
Since the TSP is designed for long-term retirement savings, the power of compounding can significantly increase the value of the account, especially when contributions are made consistently. By starting early and contributing regularly, participants can leverage this growth potential and build a substantial retirement fund.
Finally, the TSP is a government-sponsored investment plan that offers a high level of stability and security. Unlike private sector plans that may have higher fees or variable structures, the TSP provides low-cost investment options, including several funds managed with a focus on long-term performance and stability. The government’s backing and regulation of the TSP ensure that participants’ investments are managed in a transparent and secure manner.
Plan for Retirement with AAFMAA
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This article was originally published March 23, 2017.