Top 10 Thrift Savings Plan Errors: From Withdrawing Funds to Picking the Wrong Fund Options

The Thrift Savings Plan (TSP), administrated by the FRTIB (federal retirement thrift investment board) is a retirement savings and investment plan for federal employees and members of the uniformed services. Similar to a 401(k), it provides tax benefits that many private corporations offer their employees and it offers participants a variety of investment options, allowing them to save for retirement through payroll deductions. The TSP is designed to provide long-term savings benefits and includes features such as tax-deferred growth, matching contributions for eligible participants, and a range of fund choices including government securities and common stock. Participants can also take loans against their savings and make withdrawals after separation from service or retirement. Knowing how to manage a TSP account properly can make or break a successful retirement. Here are the top 10 mistakes we’ve seen over our decades of experience helping federal employees plan their exit from their federal career. 

Learn about the FERS pension, TSP, and more at a free online federal retirement workshop. 

10. Too Aggressive with Investment Allocation at Retirement

One common mistake federal employees make regarding their Thrift Savings Plan is being too aggressively invested as they approach retirement. Many individuals become overly confident in their investment choices, opting for higher-risk funds in hopes of maximizing returns. However, this strategy can backfire, especially in the years leading up to retirement when market volatility can significantly impact their savings. It’s crucial for employees to reassess their risk tolerance at least six months before retiring to ensure they have adequate funds available when they need them most. Talking with a fiduciary financial planner you can trust is the best way to evaluate your risk level and allocate your investments accordingly. 

9. Relying on the Lifecycle (L) Funds in Your TSP Account

The Thrift Savings Plan (TSP) offers various investment options, including the Lifecycle (L) funds designed to simplify retirement planning. However, one significant problem with L funds is their tendency to be overweighted in the Government Securities Investment Fund (G Fund). This over-allocation can lead to lower returns compared to other investment options, particularly in a rising interest rate environment. While the G Fund provides safety and stability, its conservative nature tends to hinder participants from achieving the growth needed for a comfortable retirement. Consequently, investors relying heavily on L funds might miss out on potential higher yields from stock and bond investments, ultimately impacting their long-term financial goals.

Try the TSP calculator to estimate your retirement income. 

8. Moving Entire Retirement Savings to G when You Retire

Like with the previous mistakes, you don’t want to be too aggressive or too conservative. The aim is to hit the sweet spot based on your assets, risk tolerance, and financial goals. Transferring all TSP money to the G fund can present several problems for participants in the Thrift Savings Plan. While the G option offers a secure investment option, it rarely keeps up with inflation, which can significantly impact retirement savings. This is particularly concerning for federal employees and uniformed service members who rely on the TSP as their primary retirement income source. With limited growth potential compared to other investment options like the C fund, a stock index fund, participants may find that their savings stagnate over time. Therefore, while the G fund is a safe choice, but it is always not be the best option for TSP participants looking to effectively grow their retirement accounts and maintain their purchasing power in the long run. Read this article to learn why it’s time for federal employees to rethink their the international option (I Fund). 

7. Moving to Conservative Investment Strategy Too Quickly

Related to the above misstep, it is possible to become more conservative without just moving all money in your employer plan to G. While it is true that federal retirees should slowly shift from more aggressive investments to more conservative strategies, the key word is “slowly.” Too many federal civilian employees shift to conservative allocations upon retiring from federal service, even though the bulk of the money in TSP funds won’t be touched until much later after retiring. The idea is become more conservative five years before the funds are withdrawn and possibly subject to taxes, not five years before leaving your federal job. This is why rolling over the TSP into an IRA to be managed by a fed-expert financial planner is often a good idea to ensure you are on track to attain all of your retirement goals. 

6. Overexposure to One Asset Class Across All Portfolios

When participating in a thrift savings plan (TSP) or managing investments outside of IRAs, it’s important to diversify your portfolio. Overexposure to a single investment asset class can lead to significant risks, especially for federal employees and members of the uniformed services. The TSP is the largest defined contribution plan in the world, offering various investment options such as G funds, C funds, and L funds. While these options provide tax benefits and savings advantages, concentrating too much capital in one fund or asset type can jeopardize your retirement savings and investment plan. For instance, if a TSP participant is heavily invested in a stock index fund, a market downturn could severely impact their overall retirement income. On the other hand, diversifying across mutual funds and government securities can mitigate this risk and stabilize returns.

5. Not Utilizing the TSP Mutual Fund Window or Outside Investment Account

The Thrift Savings Plan (TSP) offers several fund choices, including the G, S, C, I, and F funds, each with its own set of limitations. While these options provide a solid foundation for retirement savings, they may not offer the level of diversification that some participants, such as federal employees and members of the uniformed services, seek. For those looking to enhance their investment strategy, utilizing the mutual fund window (MFW) or an outside investment account can provide access to a broader range of investment options. This can be particularly beneficial for TSP participants who want to explore alternative funds beyond the traditional offerings of the TSP, such as Chinese companies or ESG funds, ensuring their retirement savings and investment plan aligns with their financial goals. Without opening the MFW or an outside account, it is not possible to target such securities like value equities or emerging markets, for example, both of which can boost growth potential. 

4. Applying the 4% Withdrawal Rule Incorrectly in Thrift Savings Plan

The basic concept of the 4% Withdrawal Rule is to Withdraw 4% of your retirement savings in year one, then continue with the same amount annually, adjusted for inflation. The goal is To make your savings last through retirement, ideally 20+ years. Some financial advisors suggest 3% or 5%, but 4% remains widely accepted. Portfolio composition matters for the strategy to be effective. The 4 percent rule is built on a 60% stock / 40% bond portfolio. A more conservative portfolio (e.g., 80% bonds / 20% stocks) may not generate enough growth, causing your funds to run out faster. A comparison between portfolios shows:

• • 60/40 portfolio with 10% annual return keeps more of its balance intact.
  • 20/80 portfolio with 2% return loses value quickly under the same 4% withdrawal rate.

After a few years, the more aggressive portfolio ends up with ~$25,000 more than the conservative one, highlighting how investment mix plays a major role. Read this article for a more in-depth look at the 4 percent rule and the TSP.

 3. Not Using the Roth TSP vs. Traditional TSP Account

The Roth TSP allows participants to contribute after-tax dollars. This means contributions are taxed before they enter the account, but withdrawals during retirement are tax-free, provided certain conditions are met. This type of savings and tax strategy can be particularly advantageous for younger TSP participants or those expecting their tax rate to increase in the future. The Roth TSP also offers the potential for tax-free growth on investment earnings. In contrast, the Traditional TSP allows contributions to be made with pre-tax dollars. This reduces your taxable income in the year contributions are made, which can provide immediate tax benefits. However, withdrawals are taxed as ordinary income during retirement, which could be a disadvantage if you are in a higher tax bracket at that time. The Roth TSP allows for tax-free withdrawals of contributions and earnings after a five-year holding period. In contrast, withdrawals from the traditional TSP are taxed as ordinary income. Read this article to compare the savings and tax benefits of the Roth TSP vs. traditional TSP.

2. TSP Planner: Not Contributing Enough to Receive the Full Match

TSP participants can utilize various contribution options, including:

• Basic pay contributions
• Catch-up contributions for those aged 50 and over
• Agency contributions, which are matching contributions provided by the employer
• An automatic 1% is contributed by the government each pay period

While employee contributions can go into a Roth TSP, all matching contributions from your agency have to be put into a traditional account. If unable to contribute the annual limit, which in 2025 is $23,500, the next best thing a federal employee can do is contribute 5% per pay period to receive the full government match. Thousands in future retirement savings can ultimately get thrown out the window by not taking advantage of this benefit. 

1. TSP Talk: Not Having an Investment Strategy

The TSP is vital component of the federal employee retirement system (FERS), but its effectiveness is dependent on how strategically the money is invested. Changing strategies too often, taking “water cooler” advice from coworkers, or (as mentioned above) being too reliant on the Lifecycle fund can hamper the TSP’s ability to provide substantial financial support in retirement. Working with a fed-expert financial planner, or at least having your plan vetted by one, can ensure that you are maximizing the benefits available through the TSP, including matching contributions and catch-up contributions for those nearing retirement age. 

Schedule a free consultation now. 

Article source: official TSP website at www.tsp.gov.