Are you a federal employee or member of the Armed Forces interested in retirement planning? Do you want to take control of your financial future? Are you craving an investment plan that you can manage on your own? You’re in luck because you have access to a great investment program: the Thrift Savings Plan. This TSP Cheat Sheet covers your investment options and costs, and provides helpful tips in guiding your very own 401(k)-style investment plan to success.

Introduction

The Thrift Savings Plan (TSP) is available to all members of the Federal Employee Retirement System (FERS), the military retirement system (MRS), and the Civil Service Retirement Service System (CSRS). If you started working for the federal government before 1987, you’re probably covered under the CSRS. Newer employees belong to the FERS or the MRS programs. For those in the employ of the U.S. Government, the TSP can act as a supplement to your pension, much like an IRA. Key benefits of the TSP include the simple yet sophisticated investment options, the extremely low investment costs, and the option to choose your tax consequences. It’s much like a 401(k) you’d receive from working at a company in the private sector; one that offers low cost lifecycle funds, bond funds, and index funds.

Choose a Traditional and Roth TSP (Or Both)

Like an IRA or a private sector 401(k), you can choose between a Traditional or Roth tax treatment for your TSP. The Traditional option remains pre-tax, meaning you’ll pay taxes on earnings and contributions when you withdraw at retirement. The Roth option is after-tax: you’ll pay taxes on the money as it goes into your TSP account but will never pay taxes on any of the earnings, no matter how much it grows. If you make a qualified distribution, you won’t pay any penalties or fees either.

Contribution Limits

The contribution limits in 2017 are the same as a 401(k): if you’re under 50, you can make regular annual contributions of up to $18,000. If you’re 50 or older, you can opt for “catch-up” contributions that max out at $24,000 annually. But here’s a bonus for deployed service members and some civilians who serve in combat zones: you can contribute up to $53,000 from your income in a single year!  Consult the TSP website for the fine print on these contributions limits. A quick review of these rules tells you that you can contribute up to the $18,000 a year in after tax (Roth) contributions, but everything over that amount up to the $53,000 limit will need to be in a pre-tax account (Traditional).

Free Money with Matching and Automatic Contributions

Most federal employees can receive automatic contributions of 1% and agency-matching contributions of 5% of base pay. Starting in 2018, members of the military can do the same. If you’re a FERS employee, you will be vested in automatic contributions after three years, or after two if you hold certain congressional-related positions. This means you’ll always keep the 1% automatic TSP contribution you receive from your employer after that time. The TSP will match up to 5% of your contributions, and you’re always vested in matched contributions. Regardless of your Traditional or Roth election, if you receive matching contributions in your TSP, those contributions will be pre-tax, and will go into a Traditional TSP account. For those in the military, read my article on details about how to receive matching TSP contributions beginning in 2018. The TSP offers you a 100% rate of return with the matching contributions, so if you can get up to the 5% percent match it’s a must-have.

Fees that Can’t Be Beat

You won’t believe the cost of doing business with the TSP. In 2015, the cost per $1,000 invested was .029%. That’s 29 cents. This is extremely low, and you will probably never find a cheaper investment program! There has to be a secret to these low costs right? The government uses forfeited (non-vested) agency automatic contributions to cover expenses so active employees see a reduced cost. Even without the benefit of using non-vested employee contributions, the expenses would equal to 42 cents per $1,000, which is only slightly less awesome than an expense ratio of .029%. The net expense ratio of each TSP fund beats the costs of these 5 low cost index ETF’s. As you’ll read below about rollovers, if you are fanatical about cutting investment fees, then you also have the opportunity to “back the truck up” and take advantage of these legendary low costs. Research shows that having low investment fees (costs) over the life of an investor can be a major boost to retirement savings.

Simple Investment Options

In today’s world of information overload, you may feel helpless having to make what seems like an impossible choice between hundreds of mutual or index funds when it comes to saving for retirement. The TSP is brilliant in that it gives you choices that cover most of the major market sectors in just five low cost funds: the G, F, C, S, and I funds. You can invest in any of the funds in any ratio you desire. All of these except the G fund are managed by BlackRock, the world’s largest asset manager. In addition to these five funds is your sixth option: the L Fund, or lifecycle fund. Click on each hyperlinked title below if you want to directly access a two-page guide from the TSP.gov website.

G Fund

The Government Securities Investment Fund consists of short-term U.S. Treasury securities that are only issued to the TSP.  Contributions to this fund are protected against inflation, and you are guaranteed to never lose any of your principal.

For those who’ve had accounts opened before September 5, 2015, if you’ve kept your contributions on auto pilot and never elected to allocate your funds, this is what you’re invested in. Historically this fund has maintained a return higher than T bills and the rate of inflation.

Lifetime Return: 5.29%

F Fund

The Fixed Income Index Investment Fund tracks the Barclay’s Capital U.S. Aggregate Bond Index. This passive index fund is designed to beat inflation and the average return of a money market fund.  Unlike the G fund, money in the F fund is exposed to market risk, credit risk, and prepayment risk.

BlackRock manages this fund and selects the securities in the following categories: Credit, Asset-Backed securities, and Government (or Government-Related) securities.

Lifetime Return: 6.45%

C Fund

The C Fund is a common stock index fund that tracks the S&P 500, similar to Vanguard’s S&P 500 ETF (Ticker: VOO). Since the S&P 500 represents 81% of the U.S. stock market’s worth, when combined with the S Fund, a TSP investor is essentially investing in the total U.S. stock market.

The C Fund has an exceptional record of almost no error in matching the S&P, and when it’s off, it’s on the high side.

Lifetime Return: 10.09%

S Fund

This passive index fund tracks the Dow Jones U.S. Completion Total Stock Market (TSM), which invests in all of the stocks in the domestic market that aren’t a part of the S&P 500. There are over 3,000 stocks outside the S&P, so the S Fund follows a methodology that invests in companies with a market capitalization greater than $1 billion while selecting some businesses with a lesser market cap.

Lifetime Return: 8.37%

I Fund

The I Fund is an internationally focused stock fund that tracks the MSCI EAFE (Europe, Australiasia, Far East) index and is useful to satisfy the international recommendation of most portfolio asset allocations. This would be considered a developed market fund that has the U.K., Japan, France, Germany, and Switzerland as the top five nations percentage-wise. About 65% of your investment will be in Europe, and the remainder will go to 6 nations in the Australiasia/Far East area.

Lifetime Return: 4.23%

Lifecycle Fund

There are five active Lifecycle funds: L Income, L 2020, L 2030, L 2040, and L 2050. These Lifecycle funds follow the principle of target date retirement funds found in the private sector. As you grow older, the L fund seeks to protect your investments and earnings by automatically adjusting the asset allocation based on a median risk profile for your age.

The L fund invests in the low cost G through I funds mentioned above, and is perfect for those who want a low stress investment journey. Effective as of September of 2015, if you join the TSP program and make no election on where your money should go, it will automatically enroll you in the L fund that’s closest to the year you will turn 62.

The L income fund is for those people at or near retirement who need their money before 2017. The guiding principle of this fund is to protect your earnings from market swings and inflation.

You can invest in one or all of the L funds, but experts recommend you pick one and stick with it. Check out the second page of the L fund guide for an explanation of the “Efficient Frontier,” and how they structure the different fund allocations. Keep in mind that if you choose a lifecycle fund and also invest in any of the five letter funds, you’re repeating your investment and by nature skewing your planned asset allocation.

Free Transfers and Zero Transaction Costs

So we’ve learned about the different investment options inside the TSP, but how do you allocate your money and adjust that allocation once it’s been withdrawn from your paycheck? There are two transactions inside the plan that allow you to control the path of your investments: Interfund Transfers and Contribution Allocations. These two free options will keep costs down over your career of investing in the plan. Interfund Transfers move money around inside your account after it has already been deposited. TSP members can move the funds between all five letter funds and lifecycle funds and adjust them to any ratio. You can make two transfers each month free of charge for a total of 24 in a calendar year.  Over a 30-year investment span that equals to 720 free transfers (or trades). You can’t move a specific dollar amount, but rather you will be required to adjust the percentages allocated to each fund. All this means is that you’ll have to do a little math to determine what percentage to adjust. After your first two transfers of the month, you may only move funds into the G Fund. So you’ll need to wait until the start of the next month to be able to move money into the other letter funds or a lifecycle fund. If you have both a Roth and Traditional account, the interfund transfer will apply to both accounts, as you are not allowed to adjust the two independently. Contribution Allocations pre-designate where your money will go as it comes out of your paycheck. As mentioned before, if you never set your contribution allocations, they will either be going into the G Fund or the Lifecyle fund that is closest to the year you turn 62. Using a modern portfolio theory, you can set your contributions to automatically follow your preset plan. The allocation plan stays the same until you change it, and all of your contributions (agency matching, special pay, automatic contributions, etc.) will go through the allocation plan you’ve created. These transactions can be done on the TSP website or their phone system, called ThriftLine.

Rollovers from Your Other Accounts

If you already have a TSP account, you can roll tax-deferred (Traditional) IRA’s into the TSP. This is a great option for those wanting to maximize their use of those low-fee funds. If you have a Roth 401(k), 403(b), or 457(b), you may be able to roll those funds into the TSP, but you cannot rollover/transfer any Roth IRAs or Roth distributions. The money you rollover won’t count toward your contribution limits, and you’ll have to open a TSP account prior to rolling anything over to it. You can start a Roth TSP balance by rolling one of the three plans into a TSP account. Keep in mind that it can take up to a few weeks to actually open your account and access it for the first time. The TSP governing body requires user authentication via snail mail, so if you want to do a Roth or Traditional transfer, wait until you have your TSP account up and running prior to initiating the process. Resource: Track your TSP and other investments with Personal Capital’s free financial dashboard.

Next Steps

Decisions

From those legendary low costs to index funds that cover the world market, this 401(k)-like investment is a great opportunity for government employees to take control of their financial future. The important thing is to get going on setting up your own TSP account and sticking to your plan. Was this TSP cheat sheet helpful for you? Have you found ways to hack your TSP account to maximize your returns? Let us know in the comments below. Additional Resources: TSP Home TSP Guide  TSP Funds Everything you need to know about this 401k type fund, the TSP Cheat Sheet all government employees should read. Covers costs, funds, fees, and taxes.

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