Advice for a Thrift Savings Plan Allocation

Different investment options for your TSP nest egg offer different risks and rates of return.
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Thrift savings plans are the employer-sponsored retirement plan for government employees. When you're putting money in your TSP, you have to choose not only the type of fund you want to invest in, but also whether you want to make traditional or Roth TSP contributions. Consider consulting a certified financial planner to assist you in determining how to allocate the money in your TSP.

Traditional Versus Roth

When you're making your contributions to your TSP, you must decide whether you want the money to go in a traditional TSP or Roth TSP. With a traditional TSP, your contributions are deductible, but your withdrawals count as taxable income. So, it makes the most sense to use if you're in a higher tax bracket when you make the contribution than the bracket you expect to be in when you take withdrawals. Roth TSPs offer the opposite: you make after-tax contributions but take tax-free qualified withdrawals when you retire. So, consider a Roth if you expect to pay a higher tax rate in retirement than you do when you make the contribution.

Lifecycle Funds

One option for investing your TSP funds is simply to use the lifecycle, or "L," fund based on your target retirement date. When you're younger and retirement is farther away, the fund invests in more stocks and bonds that will yield higher returns, though they also come with more risk. As you get older, the fund automatically reallocates your portfolio to invest more heavily in government securities and other low-risk investments since you have less time to make up for any losses.

Government Securities Investment Fund

You're also free to pick how you want to allocate your TSP dollars among the five individual funds offered by the TSP. The first fund is the government securities investment fund, which invests only in government securities. Though there's virtually no risk of losing money because all of the securities are backed by the U.S. government, you also won't earn very high rates of return. So, these funds are usually best when you're approaching retirement and don't want to risk losing any of your principal.

Index TSP Funds

TSPs also offer four other funds that track various market indexes. These funds carry varying degrees of risk and return and you're allowed to allocate your investments among them. The Fixed Income Investment Fund invests in bonds and tracks the Barclays Capital U.S. Aggregate Bond Index. The Common Stock Index Investment Fund tracks the S&P 500 investments. The Small Capitalization Stock Index Fund tracks the Dow Jones U.S. Completion Total Stock Market. The International Stock Index Investment Fund tracks the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.

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