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- How the TSP Actually Works (Most Feds Don’t Really Know)
How the TSP Actually Works (Most Feds Don’t Really Know)
Let’s clear something up:
Getting your 5% match is not the same as maxing out your TSP.
It’s one of the most common—and most expensive—misunderstandings among federal employees.
Whether you’re new to government service or nearing retirement, knowing how the TSP actually works could unlock tens (or hundreds) of thousands more in retirement wealth.
Here’s what you really need to understand about contributions, matching, fund selection, and long-term strategy.
1. What the TSP Really Is (and What It’s Not)
The Thrift Savings Plan (TSP) is often called the “federal 401(k),” but here’s what sets it apart:
Ultra-low fees (less than 0.05% in most cases)
Limited, but powerful fund options
Built-in employer match for FERS employees
But none of that matters if you misunderstand how money flows into it.
The TSP is made up of:
Your automatic 1% contribution (from your agency, regardless of what you contribute)
Your elective deferrals (what you choose to put in)
Your agency match (up to 4%)
Growth (or loss) based on your investment choices
2. “I Get the Full Match, So I’m Maxing Out” — Not Quite
Here’s the myth in action:
“I contribute 5% and get the full match. That means I’m maxed out, right?”
Nope.
For 2025, the IRS contribution limit for TSP (and 401(k)-style plans) is:
$23,000 if you're under age 50
$30,500 if you're 50 or older (with catch-up contributions)
Your agency match does not count toward these limits.
So if you're only contributing 5%, you're likely contributing just $4,000–$7,000 per year, depending on your salary—well short of the IRS maximum.
If you earn $100K and only contribute 5%, you’re potentially missing out on $16,000+ in tax-deferred or Roth savings annually.
Over 20 years, that could mean a six-figure difference in retirement.
3. Your Funds: Not All Growth Is Created Equal
The TSP offers six core fund options:
G Fund: Government securities — no risk, but very limited return
F Fund: Fixed income — bond-based, still conservative
C Fund: S&P 500 — U.S. large-cap stock exposure
S Fund: U.S. small/mid-cap stocks
I Fund: International stocks
L Funds: Target-date funds that automatically shift allocations
New hires are defaulted into the L Fund for their target retirement date, but even these may not match your personal risk tolerance, financial goals, or market views.
Quick check:
If your TSP has been sitting in the G Fund for years… you’ve likely been underperforming inflation.
4. The Tax Strategy That Gets Ignored Until It’s Too Late
Choosing between Traditional (pre-tax) and Roth TSP can shape your retirement tax bill more than most people realize.
Here’s the rule of thumb:
Roth = pay taxes now, enjoy tax-free growth and withdrawals later
Traditional = lower taxable income now, but owe taxes on withdrawals
But here’s the kicker:
Many feds contribute blindly to Traditional just to reduce their current tax bill—without realizing they may be retiring into a higher tax environment.
💡 Pro tip: If you’re early or mid-career and expect your retirement income to match or exceed your current income, Roth may give you more flexibility and lower long-term tax drag.
What to Do Next: TSP Self-Audit Checklist
Want to make sure you’re on track? Here are 3 quick checks to perform this week:
Are you contributing enough to max out your TSP limit this year?
(Hint: 5% is not the max.)Do you know what fund(s) your money is in—and why?
If not, log in and check your allocations and recent performance.Are you intentionally using Roth vs. Traditional—and revisiting that yearly?
Your tax strategy should evolve with your career and income.
Best,
—Federal Wealth Retirement