Six common TSP errors that reduce federal employee retirement outcomes — a planning reference for advisors working with FERS clients.
Advisor Takeaway
The Thrift Savings Plan (TSP) is the primary defined-contribution retirement vehicle for most federal employees, but several recurring misunderstandings consistently surface in client portfolios. Advisors working with FERS and CSRS clients should be aware of the following planning gaps as each one affects long-term accumulation, tax efficiency, or estate outcomes.
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SUBCRIBE HEREUndershooting the Agency Match
Under FERS, agencies automatically contribute 1% of basic pay to the TSP regardless of employee contributions. Agencies also match employee contributions dollar-for-dollar on the next 3% of basic pay, and 50 cents on the dollar for the following 2%, yielding a total potential agency contribution of 5% of basic pay. Employees who contribute less than 5% forgo some portion of this match, and this can create a gap that compounds significantly over a full career. Advisors should confirm contribution rates during onboarding and verify that FERS clients are capturing the full matching contribution.
Remaining in the Default G Fund
Employees auto-enrolled in TSP are placed in the Government Securities Investment Fund (G Fund) by default. The G Fund preserves principal and is exempt from market volatility, but it has historically produced lower returns than equity-weighted allocations over longer time horizons. Many employees remain in the G Fund indefinitely without reviewing their investment election. Advisors should confirm that TSP fund allocations are intentional and consistent with the client’s time horizon and broader portfolio strategy. Investing in the G Fund can incur serious inflation risk if none of the other TSP core funds are neglected.
Taking TSP Loans Without Understanding the Full Cost
TSP offers two loan types: a general purpose loan (repayable within 5 years) and a residential loan (repayable within 15 years, available for primary residence purchase). While TSP loans avoid early withdrawal penalties, they carry planning risks advisors should flag. Repayments are made with after-tax dollars, but the repaid amounts re-enter a traditional TSP account as pre-tax funds, meaning those dollars will be taxed again at distribution. Additionally, any outstanding loan balance not repaid within 90 days of separation from federal service is typically declared a taxable distribution and could be subject to a 10% early withdrawal penalty if the employee is under age 55 when they retire. Advisors should encourage clients to exhaust other liquidity options before accessing TSP through a loan.
Why 55?
Thanks the SECURE Act 2.0, if a federal employee retires at 55 or older, they can start taking qualified from withdrawals from their TSP. If they retire under 55, however, then they must waiting until they are 59.5 to avoid the IRS age-based penalty for early withdrawals from retirement funds.
Withdrawals at Age 50 for Special Provisions Employees
For employees in Special Provisions positions such Law Enforcement Officers (LEOs), Firefighters (FFs), and Air Traffic Controllers (ATCs), the penalty-free window opens at age 50. This provision is a meaningful planning tool for clients who retire before 59½ and need to bridge income from TSP without incurring the 10% early withdrawal penalty.
Overlooking the Roth TSP
The Roth TSP option has been available since 2012 but remains underutilized in many federal employee portfolios. Unlike a Roth IRA, the Roth TSP has no income limit. Any federal employee, regardless of earnings, can direct contributions to the Roth TSP. Contributions are made after-tax, and qualified distributions in retirement are exempt from federal income tax. Advisors should evaluate whether a traditional-only TSP strategy remains appropriate given the client’s current marginal tax rate versus expected rates in retirement. A split contribution approach may benefit employees in lower-to-moderate tax brackets, particularly those earlier in their federal careers. However, even if all employee contributions are made to the Roth TSP, all matching contributions must be put in a traditional account.
Outdated or Missing Beneficiary Designations
TSP beneficiary designations follow a statutory order of precedence and are not governed by the terms of a will or trust. If no Form TSP-3 is on file, TSP distributes account assets in the following default order:
- designated beneficiary on file,
- widow or widower,
- child or children equally,
- parents equally or the surviving parent,
- estate executor or administrator,
- next of kin.
Many employees have not updated their TSP-3 since initial enrollment, and some have never submitted one. Advisors should verify that a current TSP-3 is on file with the TSP record keeper and that it reflects the client’s current estate planning intent, particularly following marriage, divorce, the birth of a child, or other major life events.
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