Thrift Savings Plan

The federal government’s Thrift Savings Plan, or TSP, is a retirement plan much like civilian and corporate 401(k) retirement plans. The plan allows federal employees and military personnel to contribute a portion of their salary for retirement. Contributions can be a set amount or a percentage of pre-tax income.

The TSP is considered the gold standard of 401(k)s because it charges extremely low fees and offers mutual funds that invest in a cross-section of the stock and bond markets. Its returns have far outpaced similar mutual funds, in large part due to costs that are about 1/25th or less of what the average mutual fund charges.

The TSP’s large-company U.S. stock fund, for example, charges 0.029% in annual expenses compared with the 0.74% operating fee charged by the average equity fund. The TSP fund, then, charges $2.90 per $10,000 compared with $74 per $10,000 charged by the average equity fund. Over time, that results in a huge difference in returns. The TSP’s expenses are also “all in,” while the operating fee for other funds does not include any sales charges imposed on investors.

Since the contributions to your TSP occur before taxes are deducted from your paycheck, your tax liability is less than if you made no contributions. The more you contribute to your TSP, the less in taxes you pay each year. Once you reach retirement age and can start withdrawing from your plan, you will most likely be in a lower tax bracket and, therefore, pay less in taxes on the income you receive from your TSP retirement funds.

Retirees can keep their money in the TSP after they retire and move outside retirement accounts into the TSP. Despite that option, and the ultra-low costs of TSP funds, active and former U.S. government employees and members of the military are moving billions of dollars out of the program.

Members of the military and other federal employees are in part leaving the TSP to move to higher cost Individual Retirement Accounts, perhaps believing that outside money managers can generate higher returns. The TSP's low costs, however, mean that retirees who transfer out of the TSP are almost certainly paying more in investment costs, commissions, and other fees. You can read more here about the risks public-sector employees take when they remove their money from a defined-benefit pension plan or, as in the case of the TSP, a low-cost retirement savings plan.