The Thrift Savings Plan (TSP) is the federal government’s retirement savings plan for federal employees and members of the uniformed services. Most people describe it as the government’s version of a 401(k), but the TSP has its own rules, fund lineup, matching structure, and withdrawal options that matter a lot once you’re within a few years of retirement.

Understanding how a TSP works is less about memorizing every rule and more about knowing how the account grows, what drives your long-term results (contribution habits + fund choices + fees), and how distribution decisions can affect taxes and retirement cash flow. Many retirees also explore a direct rollover into other retirement accounts to create more predictable income and simplify their plan after separation.

At Diversified Insurance Brokers, we frequently talk with federal retirees who have built meaningful balances inside the TSP and want a clearer plan for the “next phase”: how to manage risk as retirement approaches, how withdrawals really work, and when a rollover (including annuity-based income planning) may fit their goals.

What the TSP Is (and Why It’s Different Than Most Workplace Plans)

The TSP is a defined contribution plan, meaning your retirement outcome depends on how much you contribute, how your investments perform, and how you withdraw funds later. There is no guaranteed pension “formula” inside the TSP itself. Instead, you build a balance over time and then decide how to turn that balance into income.

What makes the TSP stand out is its streamlined fund menu and its historically low costs. In practical terms, lower fees matter because they reduce the friction on compounding. Over a long career, even small cost differences can show up as meaningful dollars in retirement.

Another key difference is the TSP’s fund lineup. You won’t see hundreds of mutual funds with overlapping strategies. You’ll see a core set of broad, index-based options plus Lifecycle funds designed to automatically adjust risk over time. That simplicity is a strength if you use it intentionally, but it can also create “set-it-and-forget-it” behavior that doesn’t always match your risk tolerance as retirement approaches.

Who Can Participate in the TSP?

The TSP is available to federal civilian employees and members of the uniformed services. If you are a civilian employee, your eligibility typically begins when you are hired into an eligible position. If you are in the uniformed services, you can also participate, and depending on your service status and system, your matching rules may differ from a typical civilian employee’s experience.

Most federal employees think of TSP participation as automatic because contributions can be made through payroll deductions, and the plan is commonly integrated into onboarding. Even when participation begins automatically at a default percentage, the long-term value usually comes from actively choosing a contribution rate and fund allocation that fits your timeline and risk capacity.

It’s also important to understand that the TSP is not a “one-size-fits-all” account. Your choices and rules can look different depending on whether you are covered under FERS versus another system, whether you have both Traditional and Roth balances, and whether you are still employed or separated from service.

Traditional TSP vs. Roth TSP: How Taxes Work

When people ask how the TSP works, they often start with the tax question, because taxes are the “invisible” factor that can change how much spendable income you actually get in retirement. The TSP offers two main tax treatments: Traditional (pre-tax) and Roth (after-tax). You can also split contributions between the two if you want both types of money later.

With a Traditional TSP, your contributions reduce your taxable income today. Your account can grow tax-deferred, and you typically pay ordinary income tax when you withdraw the money in retirement. This can be useful if you expect to be in a lower tax bracket later, or if you want to reduce taxable income during your working years.

With a Roth TSP, you contribute after-tax dollars. Your contributions don’t reduce taxable income today, but qualified withdrawals later can be tax-free. Many retirees like the Roth approach because it can create flexibility: you may have years where drawing from Roth balances helps manage taxable income, Medicare thresholds, or other tax-based triggers.

The “best” choice is rarely universal. For many federal employees, it comes down to how much taxable income they expect in retirement (pension + Social Security + required distributions), whether they want tax diversification, and whether their goal is maximum flexibility or maximum current-year tax reduction.

How Contributions and Government Matching Work

The TSP is funded primarily through payroll deductions. You choose a percentage or dollar amount to contribute each pay period, and those contributions are invested according to your fund selections. Over time, the plan balance grows from three main sources: your contributions, any matching contributions you receive, and investment performance.

For many federal employees, the match is the single most important “first win” in the plan. Matching contributions are essentially part of your total compensation, and failing to contribute enough to receive the full match can be like leaving benefits on the table. The matching formula depends on your system and eligibility, but the practical takeaway is the same: you want to understand how to capture the match as efficiently as possible.

Contribution limits can change year to year, and catch-up contributions may be available depending on age and rule updates. Rather than focusing on a single year’s number, the better long-term approach is to set an intentional target (for example, a consistent percentage of pay), review it annually, and adjust it when income changes, expenses change, or retirement gets closer.

Another important point is that the match applies to contributions made through payroll. If you stop contributions for a period of time, you may not only slow growth, you may also reduce matching contributions during that period. Many federal employees use a “minimum baseline” contribution rate that is sustainable even in higher-expense seasons of life, and then increase contributions when possible.

The TSP Funds: What You’re Actually Investing In

The TSP’s investment lineup is intentionally simple. Instead of choosing from hundreds of funds, you choose from a handful of broad options that cover major market segments, plus Lifecycle funds that bundle those options together based on a target retirement year.

G Fund: This fund invests in government securities and is designed to preserve principal while earning a rate based on Treasury securities. In plain English, it’s the most stability-focused option in the plan, and many federal employees use it as part of a defensive allocation as retirement approaches.

F Fund: This fund tracks a broad U.S. bond index. It’s generally considered a core fixed-income option, but it can still fluctuate with interest rates. People often assume “bonds don’t go down,” but bond values can decline in rising-rate environments, which is why bond exposure should still be intentional.

C Fund: This fund tracks large U.S. companies and is commonly associated with S&P 500 exposure. It is growth-oriented over long periods, but it can experience meaningful declines in down markets, especially over shorter time windows.

S Fund: This fund tracks smaller U.S. companies. It can add growth and diversification, but it can also be more volatile than large-cap exposure, which matters when you are close to drawing income.

I Fund: This fund provides international developed market exposure. It can diversify a portfolio away from the U.S. market, but it also introduces different economic and currency-related drivers.

Many federal employees choose a simple mix of these funds and rebalance periodically. Others prefer Lifecycle funds because they want an automatic glide path that gradually reduces risk over time. Either approach can work, but the best results usually come from matching your allocation to your retirement timeline and your ability to tolerate market drawdowns.

Lifecycle (L) Funds: The “Auto-Pilot” Option

Lifecycle funds are designed to make allocation easier. You choose a fund aligned with your target retirement year, and the fund automatically rebalances over time, gradually shifting from more growth-focused allocations to more conservative ones as the target date approaches.

The advantage is simplicity. If you don’t want to monitor allocations or make changes through market cycles, Lifecycle funds can reduce decision fatigue and help keep you invested with a consistent structure. The risk is that “target year” does not always equal “target risk.” Two retirees with the same retirement year can have very different pensions, expenses, spousal income situations, and comfort levels with market volatility. That’s why it can be helpful to periodically confirm that the Lifecycle fund’s glide path still matches your real-world needs.

Another overlooked point is that retirement is not a single day; it is a multi-decade phase. Some retirees treat the target date as the moment they should become extremely conservative, but others need growth exposure for longer because they expect a long retirement horizon. The right approach depends on your income plan, not just your age.

How a TSP Balance Builds Over Time

Your TSP grows through a compounding process. Contributions are made repeatedly, matching contributions may be added, and your invested balance fluctuates based on market performance. Over long periods, the combination of consistent contributions and compounding can produce significant results, even if markets do not move in a straight line.

The biggest driver of outcome is often contribution consistency. People naturally focus on “what did the market do,” but two employees with the same salary can have dramatically different TSP outcomes depending on whether they contributed early, whether they captured the match consistently, and whether they increased contributions as income rose over time.

Investment allocation matters too, especially as retirement approaches. In the final years before retirement, sequence-of-returns risk becomes more important. That is the risk that a downturn early in retirement can permanently reduce how long money lasts, even if long-term average returns look fine on paper. This is one reason many retirees explore more defensive allocations, partial rollovers, or guaranteed-income tools as they move from accumulation to distribution.

Fees: Why the TSP’s Cost Structure Matters

One of the most common reasons federal employees appreciate the TSP is that fees are typically low compared to many workplace retirement plans. When fees are low, more of your investment return stays in your account, which strengthens compounding over time.

Fees can feel like a minor detail, but they are persistent. A small difference repeated over decades can be meaningful. This is also why rollover decisions should be evaluated carefully. Sometimes a rollover can create better income options or planning flexibility, but it can also introduce different fee structures depending on where the money goes and what products or investments are chosen.

TSP Loans: How They Work and What to Watch

The TSP offers loan options while you are still employed, commonly structured as a general-purpose loan or a residential loan. Loans are repaid through payroll deductions. People often like loans because the process can be straightforward compared to other borrowing options, and the repayments are structured automatically.

However, a loan is still a form of leakage from retirement compounding. When you borrow from the account, you temporarily reduce the invested balance, which can reduce growth potential. The bigger risk is what happens if you separate from service with an outstanding loan. Depending on the rules and timing, the remaining balance may need to be repaid or it can become a taxable distribution. That can create a surprise tax bill at exactly the wrong time.

The practical approach is to treat loans as a strategic tool, not a default habit. If a loan is used, many employees plan repayment intentionally and avoid stacking multiple loans over time.

Withdrawals After Separation: Your Core Options

Once you separate from federal service, the TSP becomes a distribution account. You can still stay invested, but now decisions about withdrawals, taxes, and income stability become the center of the plan.

In broad terms, retirees usually think about three major withdrawal paths. The first is a lump-sum approach, where you take a full withdrawal of the balance. This can be simple, but it can also create large taxable income and remove the benefits of tax-deferred growth if done all at once.

The second is partial or installment withdrawals. This is the “manage it yourself” approach: keep money invested, withdraw as needed, and try to balance market risk with income needs. Many retirees use this approach successfully, but it requires attention to allocation, withdrawal rate discipline, and tax planning.

The third path is to use a rollover strategy to reposition some or all of the balance into accounts or structures that better match retirement cash-flow goals. Some retirees keep a portion in the TSP for its low-cost exposure and simplicity, while rolling another portion into an IRA for a broader investment menu or for income planning tools. Federal retirees who want contract-defined income often explore an annuity strategy after a rollover into a qualified account structure.

It can also be helpful to understand how your TSP choices relate to similar employer plans, especially if you or your spouse have multiple retirement accounts. If you want a broader overview of employer-plan mechanics, this guide can help: How Does a 401k Work?

Taxes, Penalties, and Timing: What Most People Miss

Taxes on TSP withdrawals depend on whether money comes from Traditional or Roth balances, and whether the withdrawal is qualified. Traditional withdrawals are generally taxable as ordinary income. Roth withdrawals can be tax-free if they meet the requirements. If you have both types of money, understanding which dollars are being withdrawn (and when) can matter a lot for net income.

Penalties for early withdrawals can apply if you withdraw before a qualifying age or without an exception. The key concept is that “retirement account rules” can look different depending on the type of plan and the nature of your separation. That’s why many retirees choose to coordinate withdrawal timing with a broader plan that includes pensions, Social Security timing, and other income sources.

Required minimum distributions (RMDs) also matter. Eventually, Traditional retirement money is subject to distribution requirements. If RMD planning is not handled properly, penalties can be significant. Even when you have the cash flow to pay the tax, the timing of withdrawals can affect other planning areas, which is why many retirees evaluate tax diversification and income smoothing strategies years before RMDs begin.

Beneficiaries and Survivor Planning

Federal employees often have multiple layers of survivor planning: pensions, insurance, and the TSP itself. The TSP allows you to designate beneficiaries, and beneficiary designations should be reviewed periodically—especially after major life changes such as marriage, divorce, or the birth of a child.

Beneficiary planning is not only about “who gets it.” It’s also about how your beneficiaries will receive it, what tax treatment may apply, and whether a rollover or inherited account structure will be used. Many families find that simplifying accounts in retirement can make future administration easier for spouses or heirs.

Rolling Over a TSP: When It Can Make Sense

A rollover is a way to move retirement assets from the TSP into another qualified retirement account without triggering immediate taxes, when done correctly. Many retirees consider a rollover because they want a different investment menu, more flexible distribution planning, or an income strategy that the TSP doesn’t directly provide.

The cleanest way to move money is typically a custodian-to-custodian transfer, often referred to as a direct rollover. The idea is simple: the funds move from the TSP directly to the receiving institution so the distribution is not paid to you personally. This can help avoid withholding issues and reduce the chance of a paperwork mistake that could create unintended taxes.

Retirees who want more planning flexibility often compare the TSP to an IRA structure. If you want to understand the IRA mechanics and why some retirees consolidate accounts into an IRA after separation, this overview can help: How Does an IRA Work?

For retirees with meaningful Roth balances, it’s also useful to understand how Roth retirement accounts work in distribution years, because the rules can feel different than Traditional accounts. This guide explains the basics: How Does a Roth IRA Work?

Why Some Federal Retirees Use Annuities Alongside (or After) the TSP

The TSP is an excellent accumulation tool, but it is not designed to guarantee lifetime income the way a traditional pension does. In retirement, many people want part of their plan to feel like a paycheck: predictable, stable, and not dependent on market performance each month.

This is where annuity planning comes into the conversation. A common approach is to move a portion of retirement money into a structure that can provide contract-defined income. The goal is not necessarily to “annuitize everything.” Often it is to create a stable income floor that covers core expenses so the remainder of the portfolio can be invested with more patience.

When federal retirees evaluate annuities, they often focus on three practical outcomes. First, income certainty: knowing that a baseline amount can arrive monthly regardless of market conditions. Second, market-risk management: reducing the chance that a market downturn early in retirement forces large withdrawals from a declining portfolio. Third, simplification: shifting from self-managed withdrawals to a more predictable income plan.

If you’re exploring annuity-based strategies after separation, this page is a helpful starting point: Annuities

One of the most important planning steps is deciding how much to convert to guaranteed income versus how much to keep liquid for flexibility, emergencies, and opportunity. That decision depends on pension income, household expenses, Social Security timing, health expectations, spousal considerations, and your comfort level with market volatility.

Because each federal retiree’s situation is different, many people benefit from comparing multiple income designs before choosing a path. This is also why the rollover conversation should be deliberate and paperwork-accurate. If you want the nuts-and-bolts definition and process, revisit this guide: What Is a Direct Rollover?

Common TSP Mistakes That Can Cost Real Money

Most TSP “mistakes” aren’t dramatic—they’re quiet. They look small in the moment and become expensive over time. One example is under-contributing early in a career and never catching up. Another is ignoring allocation risk as retirement approaches, assuming that market volatility will “average out” even when the timeline is short and withdrawals are starting.

A third is making distribution decisions based on what feels simplest rather than what is most tax-efficient. A large lump-sum withdrawal can create a single-year tax spike that permanently reduces the long-term value of the account. Similarly, failing to coordinate Traditional and Roth withdrawals can cause avoidable taxable income in years where planning could have reduced it.

Finally, paperwork matters. Rollover and distribution forms should be completed carefully, especially when coordinating multiple accounts. A properly executed rollover can preserve tax benefits and expand options. A sloppy transfer can create withholding issues or unintended taxable events.

How to Think About Your TSP as a Retirement Income Tool

During your working years, the TSP is an accumulation engine. In retirement, it becomes an income reservoir. That shift changes the decision framework. You are no longer optimizing only for growth; you are optimizing for reliability, longevity, and the ability to fund spending through good markets and bad markets.

Many retirees do well with a “bucket” mindset even if they keep everything in one account. One portion is designed for near-term income stability, one portion is designed for medium-term flexibility, and one portion is designed for long-term growth. This is not about complicated investing; it’s about matching dollars to time horizon so you aren’t forced to sell risk assets during a downturn to pay near-term bills.

This is also where guaranteed income can play a role. If you already have a pension that covers most core expenses, you may not need additional contractual income. If your pension covers only part of expenses, using a portion of retirement money for guaranteed income can reduce stress and help protect the rest of the portfolio from sequence risk.

When federal retirees begin shaping a distribution plan, the question usually becomes: “How much do I want guaranteed, and how much do I want flexible?” The right answer depends on your household—so the most valuable next step is often to compare multiple designs side by side rather than assuming there is only one correct path.