How Does a TSP Work?
Jason Stolz CLTC, CRPC
The Thrift Savings Plan (TSP) is a tax-advantaged retirement account designed for federal employees and members of the uniformed services. It’s often called the federal government’s version of a 401(k) — providing participants with a low-cost way to save, invest, and grow their retirement funds. Contributions can be made on a pre-tax or Roth (after-tax) basis, and many employees receive government matching contributions.
Understanding how the TSP works — from contribution limits and fund options to withdrawals and rollover strategies — is essential to maximizing your benefits. Many retirees also explore TSP rollovers into annuities to secure guaranteed lifetime income, protect against market risk, and simplify post-retirement cash flow planning.
TSP to Annuity Conversion Made Simple
Discover how rolling over your TSP into an annuity can transform your savings into guaranteed lifetime income.
TSP Basics: Contributions, Matches, and Growth
The TSP allows participants to save for retirement through automatic payroll deductions. You can choose between a Traditional TSP (pre-tax contributions) or a Roth TSP (after-tax contributions), or use both to balance tax exposure.
- Eligibility: Available to federal employees, postal workers, and members of the uniformed services.
- Contribution limits: In 2025, you can contribute up to $23,000 per year, plus an additional $7,500 in catch-up contributions if age 50 or older.
- Matching contributions: FERS employees receive a dollar-for-dollar match on the first 3% of pay, and 50 cents on the dollar for the next 2% — for a maximum 5% match.
- Investment options: The TSP includes five core funds and Lifecycle (L) Funds that automatically rebalance based on your retirement date.
- Fees: Among the lowest in the industry, typically around 0.06% annually, allowing your balance to compound faster.
TSP vs. 401(k): Key Differences
While both the TSP and 401(k) are employer-sponsored retirement plans, there are a few distinctions federal employees should understand:
| Feature | TSP (Federal Employees) | 401(k) (Private Sector) |
|---|---|---|
| Eligibility | Federal employees and military | Private-sector workers |
| Investment Options | 5 Core Funds + L Funds | Varies by plan provider |
| Administrative Fees | Extremely low (~0.06%) | 0.5%–2% on average |
| Employer Match | Up to 5% | Varies by employer |
| Withdrawal Options | Partial, full, or installment withdrawals | Typically lump-sum or rollover |
| Roth Option | Yes (Roth TSP) | Yes (Roth 401k) |
Estimate Lifetime Income from Your TSP
The Five Core TSP Funds
Each TSP fund carries a different level of risk and reward. Participants can mix and match funds or use Lifecycle (L) Funds that automatically rebalance based on target retirement date.
- G Fund: Government securities — provides stability and guarantees principal.
- F Fund: Fixed-income index fund — tracks U.S. bond markets for moderate growth.
- C Fund: Common stock index fund — mirrors the S&P 500 for higher long-term potential.
- S Fund: Small-cap stock index fund — tracks smaller U.S. companies for growth diversification.
- I Fund: International stock index fund — gives exposure to developed markets outside the U.S.
Withdrawals, Loans, and Rollover Rules
Participants can take out loans while employed or withdrawals after separation. Loans are repaid via payroll deductions and can be used for general or housing purposes. Once separated, you can choose:
- Full withdrawal: Withdraw the entire balance as a lump sum (subject to taxes and possible penalties).
- Partial withdrawal: Take out a portion while keeping the rest invested.
- Installment payments: Receive regular income payments — similar to an annuity.
- Direct rollover: Move funds into an IRA or fixed annuity to continue tax deferral and gain lifetime income options.
Why Many Federal Retirees Use Annuities Alongside the TSP
While the TSP offers outstanding accumulation benefits, it does not provide lifetime income guarantees. That’s where annuities come in. By converting part of your TSP into an income-producing annuity, you can create a dependable retirement paycheck that lasts as long as you do.
- Guaranteed income for life: Eliminate the risk of outliving your savings.
- Market protection: Secure your principal while benefiting from potential index-linked growth.
- Spousal and legacy benefits: Joint-life options protect income for both spouses and ensure a smooth transition to heirs.
- Tax advantages: Direct rollovers maintain tax-deferred status; Roth rollovers can provide tax-free income later.
Plan Your TSP Rollover with Confidence
Compare today’s annuity rates and see if a TSP rollover aligns with your retirement goals.
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