TSP Mistakes Federal Employees Make… and How to Avoid Them
These common TSP mistakes cost federal employees thousands in retirement. Learn what to watch for and how to protect your FERS benefits.
Quick Summary
Your Thrift Savings Plan (TSP) is one of the most valuable parts of your federal benefits package. It gives you a tax-advantaged way to save for retirement alongside your FERS pension and Social Security. But a few common mistakes that are often overlooked can quietly reduce what you end up with.
Not sure if your TSP is set up the right way? Schedule a free consultation with a licensed fiduciary at UB Wealth.
Not Contributing Enough to Get the Full Agency Match
If you're covered under FERS, your agency automatically contributes 1% of your basic pay to your TSP every pay period, even if you contribute nothing yourself. Your agency will also match your own contributions, dollar for dollar on the first 3% of pay contributed, and 50 cents on the dollar for the next 2%. That adds up to a potential 5% agency contribution on top of your own savings.
If you're contributing less than 5% of your pay, you're leaving part of that match on the table. Over a 20- or 30-year career, the difference can be significant. Check your current contribution rate and make sure it's at least 5% so you're capturing everything your agency is offering.
Keeping Too Much in the G Fund Without Realizing It
When you're first enrolled in TSP, your contributions automatically go into the Government Securities Investment Fund, known as the G Fund. The G Fund is low-risk, which sounds appealing, but it also tends to grow much more slowly than other TSP funds over long periods of time and is vulnerable to inflation risk.
Many federal employees stay in the G Fund for years, sometimes for their entire career, simply because they never made a different choice. If you have 10, 20, or 30 years before retirement, keeping all of your TSP in the G Fund may mean your savings don't grow as much as they could. One of the easiest steps to take if you want TSP millionaire status, is to figure out an investment allocation in your TSP account that has a balance of the five funds.
Taking a TSP Loan Without Knowing the Full Cost
TSP does allow you to borrow from your own account, and it can seem like an attractive option when you need cash. The real costs aren't always obvious, so it’s wise to think it through. When you take a loan, you repay it with after-tax dollars. Then, when you withdraw that money in retirement, it gets taxed again. You're effectively paying taxes twice on the same dollars.
There's also a more immediate risk. If you leave federal service, whether through retirement or separating for another reason, with an outstanding TSP loan, you'll typically have 90 days to repay it in full. If you don't, the unpaid balance is treated as a taxable distribution. If you're under 59½ at the time, that includes a 10% early withdrawal penalty on top of the taxes.
Ignoring the Roth TSP Option
Traditional TSP contributions lower your taxable income today, and you pay taxes when you take the money out in retirement. Roth TSP works the other way: you contribute after-tax dollars now, and qualified withdrawals in retirement are tax-free.
What many federal employees don't realize is that unlike a Roth IRA, the Roth TSP has no income limit. Anyone can contribute to it, regardless of how much they earn. Whether the Roth TSP makes sense for your situation depends on your current tax bracket and what you expect your tax situation to look like in retirement. If you've never looked at this option, it's a conversation worth having.
Not Knowing Your Penalty-Free Withdrawal Age
Most people know that taking money out of a retirement account before age 59½ can trigger a 10% early withdrawal penalty. However, thanks to the SECURE Act 2.0, if you separate from federal service in or after the calendar year you turn 55, you can take TSP withdrawals without the 10% penalty immediately.
There's one important catch. If you roll your TSP balance into an IRA after you retire, you lose access to this provision. Once those funds leave TSP, the age-55 rule no longer applies to them. Also, if you retire before that age, 59½ is still the age where no penalty applies.
Not Updating Your Beneficiary Designation
Your TSP account doesn't automatically follow your will. It follows a specific order set by law, and if your beneficiary designation on file is outdated or missing, the account may not go where you intend. After a marriage, birth of a childe, divorce, or the loss of a loved one, your TSP beneficiary should be one of the first things you update.
You can review and update your designation using Form TSP-3, available through your TSP account online. It takes only a few minutes, and it's one of the simplest things you can do to protect your family.
Next Steps
If you're not sure where you stand, a federal retirement specialist can walk through your full picture with you. Schedule your free retirement consultation. You'll receive a personalized Benefits Analysis Report at no cost, covering your TSP, FERS pension, Social Security, and more. No pressure, no obligation.