Action Points:
- We recommend switching from the Traditional to the Roth TSP to maximize tax savings in the future
- Contribute at least 5% of your paycheck to get the full match benefit
- The L fund is fine, but for your situation there might be a better mix of funds (keep reading)
Overview
The TSP (Thrift Savings Plan) is the governments version of the 401(k). A retirement plan, it provides permanent employees (sorry seasonals) the option to automatically withdraw funds from their paycheck and invest in a variety of funds for retirement.
To quickly break it down, your agency automatically enrolls you in the Traditional Roth and deducts 5% from your paycheck to be deposited into this account. This gets you an Agency Automatic Match of 1%, a 3% match of dollar for dollar, and a further 2% match at 50 cents on the dollar. You can contribute more than 5% of your pay, but your Agency only contributes up to the first 5% you contribute.
The current max contribution you can make in 2025 is $23,500, with a catch up contribution if you are age 50 or older of an additionnal $7,500.
Differences Between Roth and Traditional
Roth: the money you contribute from your paycheck gets taxed at the normal income rate, however it grows tax free and you don’t have to pay taxes when you withdraw. Something to remember, to get the tax free benefit upon withdrawal, you have to meet two criteria:
- 5 years have passed since your first Roth contribution
- You are over the age 59 ½
Traditional: the money you contribute from your paycheck goes into the account tax free, but gets taxed when you go to withdraw it.
IMPORTANT NOTE: you are automatically enrolled in the Traditional TSP by your agency, we recommend changing this to the Roth TSP to allow for tax free growth and withdrawal.
If you are a new permanent employee, I would recommend that you go into Employee Express and change your allocation to the Roth TSP. If you have a Traditional TSP with contributions already in it, they unfortunately cannot be converted into the Roth, but you can still change your contributions to go into the Roth TSP account.
Roth vs. Traditional: Which account should you chose?
It really comes down to a question on whether you want more money now or in the future. If you want more money out of your paycheck to pay the bills, you can go Traditional as your contributions aren’t taxed. If you want tax free growth and withdrawal in retirement, and want the wonders of compounding to go uninterrupted, you can go Roth.
There’s pros and cons with both, and be sure to do your own research, but if you are a young firefighter just starting out, and for most people in general, the Roth is the way to go.
IMPORTANT NOTE: you don’t have to choose from one or the other, you can contribute to both accounts simultaneously, and you can change from one account to another when ever you want.
What are the Funds?
You can invest your money in the TSP in a few different ways:
- Individual funds (G, F, C, S, I)
- L funds (Lifecycle Funds)
- Mutual funds (but we won’t discuss mutual funds for now)
The Individual Funds are made up of 5 different investment types:
- The G Fund-Government Securities: invested in short-term US Treasuries, very safe, you earn interest from the treasury bills.
- The F Fund-Fixed Income: tracks the Aggregate Bond Index, pays some yield.
- The C Fund-Common Stock Index: tracks the S&P 500 index, great for long term growth
- The S Fund-Small Cap Index: an index comprised of small and medium sized US businesses. Potentially higher investment returns, but with a risk of greater volatility.
- The I Fund-International Stock Index: broad international stock index tracking small, medium, and large businesses in developed and emerging countries (excluding China and Hong Kong). Gives you some international exposure to non-US equities.
The L Funds
The L Funds, or “Lifecycle Funds” lets you invest all your contributions into one fund that best suits your retirement age. Your agency will automatically invest you into the fund that corresponds to your closest retirement date, for example the L 2065 Fund if you expect to retire around the year 2065. This is a good choice for people who want to make contributions and not have to worry about anything after that. The L Funds offer a real “set it and forget it” approach to investing your money, as it changes the portfolio allocations as you get closer to retirement age.
For instance, the L 2065 fund will be more heavily invested in the stock funds (C, S, I) than the G or F fund to maximize for growth in your early contribution years. As you get closer to retirement age, the allocation increases to more income (G and F) and minimizes your stock index exposure in order to protect your account against any volatility as you approach retirement.
What Should You Choose?
The funds you choose depend on your time horizon and the amount of risk you’re willing to take-your risk tolerance.
If you’re nearing retirement, the L fund of your retirement year might be a good choice in order to focus on the preservation of your retirement capital.
If you are young with a long time horizon and appetite for risk, you might want the majority of your money working for you in the C, S, or I funds.
Important Note: You can allocate as much or as little to as many of the funds as you want. For instance you could allocate 50% to an L Fund of your choice, 40% to the C Fund, and 10% to the S Fund, and so on as long as your total contributions make up 100%.
Some Example Allocations:
The Warren Buffet/Aggressive:
-90% C Fund
-10% G/F Fund
The Classic “Balanced”
-60% C Fund
-40% F/G Fund
The Conservative Porfolio
-70% G/F Fund
-30% C Fund
The Falling Interest Rate Environment
-80% C Fund
-10% S Fund
-10% F Fund
Remember you can always change your allocations in you TSP account, and if you want to do some extra study and research you can more actively manage your allocations based on economic factors, such as rising/falling interest rates, etc.