TSP vs. 401(k): Maximizing Your Military Retirement Savings

The Thrift Savings Plan (TSP) is the federal government's defined-contribution retirement plan for military members and federal civilian employees. In many ways it's superior to typical civilian 401(k) plans — specifically in cost. TSP's expense ratios are among the lowest of any retirement plan in the country, running approximately 0.04% annually. Many private-sector 401(k) plans charge 10–20x that much in fees.

How TSP Works

TSP works like a 401(k): contributions come out of your paycheck pre-tax (traditional TSP) or post-tax (Roth TSP), invested in the funds you choose, and grow tax-advantaged until retirement. The 2026 elective deferral limit is $23,500/year (same as 401k limits, indexed annually). Service members 50 and older can make catch-up contributions up to $31,000.

The Investment Funds

TSP offers five individual funds and a series of lifecycle funds:

• G Fund: U.S. Treasury securities — essentially a very safe, lower-return option. Good for cash you might need soon.
• F Fund: Fixed income index (bond fund) — tracks the Bloomberg U.S. Aggregate Bond Index
• C Fund: Common stock index — tracks the S&P 500. The workhorse of most TSP accounts.
• S Fund: Small cap stock index — tracks the Dow Jones U.S. Completion Total Stock Market Index (small and mid-cap stocks not in the S&P 500)
• I Fund: International stock index — tracks international developed market stocks
• L Funds: Lifecycle funds that automatically adjust allocation as you approach a target retirement date. L 2065, L 2060, L 2055, etc.

Traditional TSP vs. Roth TSP

Traditional TSP: contributions are pre-tax, reducing taxable income today. Withdrawals in retirement are taxed as ordinary income.

Roth TSP: contributions are post-tax (no immediate tax break). Growth and qualified withdrawals in retirement are tax-free.

Which is better depends on whether you expect to be in a higher or lower tax bracket in retirement than you are now. For younger, lower-paid junior enlisted service members, Roth TSP often makes more sense — you're paying taxes at a low rate now, and withdrawals are tax-free when you'll likely be in a higher bracket. For senior NCOs and officers in higher tax brackets now, traditional TSP's current tax deduction may be more valuable.

Practical answer for most junior service members: Roth TSP is usually the right call. See our Roth vs. Traditional IRA guide for the full framework — the same logic applies to TSP.

Under BRS: The Match Is Critical

Under the Blended Retirement System (BRS, for service members who joined on or after January 1, 2018), the government matches TSP contributions up to 5% of base pay after 2 years of service. The match structure:

• Years 1–2: 1% automatic contribution from government, no match on your contributions
• Years 3+: Government matches your contributions dollar-for-dollar up to 3%, then 50 cents on the dollar for the next 2% (for a maximum 5% match on 5% contributed)

Contributing 5% captures the full 5% match. This is the minimum you should contribute if you're under BRS — it's a 100% immediate return on that 5%.

What Happens to Your TSP When You Separate

When you leave military service, you have several options for your TSP balance:

1. Leave it in TSP: Perfectly valid — TSP's low fees make it worth keeping. You can continue to invest and it grows tax-deferred. You lose the ability to make new contributions unless you go into federal civilian service.
2. Roll it into a civilian 401(k): If your new employer's 401(k) accepts rollovers, you can consolidate. Only worth doing if the new employer's plan has comparable or better options — many civilian 401(k) plans have higher fees than TSP.
3. Roll it into an IRA: Gives you maximum investment flexibility and keeps it tax-advantaged. TVACU offers IRA accounts. Rolling into a Roth IRA if you have Roth TSP or a Traditional IRA if you have Traditional TSP maintains the tax treatment.
4. Cash it out: The worst option for most people. Withdrawals are fully taxable as ordinary income, plus a 10% early withdrawal penalty if you're under 59½. You permanently lose the tax-advantaged compounding on those funds.

TSP and the Military Pension

Under the legacy High-3 pension system (for those who joined before January 1, 2018), service members who reach 20 years receive a defined-benefit pension — 50% of average highest 3 years of base pay, payable immediately at retirement regardless of age. This pension is extraordinarily valuable and changes the retirement savings calculus significantly: you have guaranteed lifetime income as a floor, and TSP savings layer on top.

Under BRS, the pension at 20 years is 40% (not 50%), offset by the TSP match and continuation pay. The BRS trade-off: less guaranteed pension income, but TSP savings vest and are portable if you leave before 20 years — which the majority of service members do.