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TSP Isn’t Just a Retirement Fund—It’s a Powerful Tool if You Use It Right

Jeff Boettcher
June 2, 2025

Key Takeaways

The Thrift Savings Plan (TSP) is more than a retirement account—it can be a strategic financial planning asset if you understand how to use it effectively.
Making informed decisions on contribution levels, withdrawal strategies, and fund allocations can have long-term impacts on your financial well-being.

Understanding TSP’s Real Potential

If you work in government, you’re likely already contributing to the Thrift Savings Plan (TSP). But it’s easy to overlook just how versatile this account really is. In 2025, the TSP remains one of the most powerful savings tools available to public sector employees. It’s not just about building a nest egg—it’s about using the TSP in coordination with your broader retirement strategy.

When used wisely, your TSP can support tax planning, risk management, income generation, and even estate planning. The key is to stop thinking of it as a basic retirement account and start viewing it as a financial instrument that can be fine-tuned for your specific needs.

Contributions: How Much and When

The first decision you make with your TSP is how much to contribute—and timing matters. In 2025, the annual contribution limit is $23,500 for regular contributions. If you’re between the ages of 50 and 59 or over 64, you can add another $7,500 in catch-up contributions. If you’re between 60 and 63, the catch-up limit increases to $11,250 thanks to Secure Act provisions.

When choosing how much to contribute:

Maximize contributions early in the year to take advantage of compound growth.
Adjust your deferral rates when you receive a pay increase or bonus.
Be mindful of your agency’s matching contributions—especially under FERS. Don’t leave free money on the table.

Fund Choices and Investment Strategy

TSP offers a lineup of core funds and lifecycle (L) funds. Each has a different risk profile and long-term objective. Allocating your contributions effectively can reduce risk while aiming for growth.

Here’s how you might consider building your strategy:

Use L Funds if you prefer automatic allocation adjustments based on your retirement timeline.
Mix core funds (G, F, C, S, I) manually if you’re more hands-on and understand market risk.
Rebalance your allocations periodically—at least once a year or after significant market shifts.

In 2025, market volatility and inflation concerns remain relevant. Conservative savers often lean on the G Fund for stability, but over-relying on it can limit growth. A diversified allocation remains critical.

Tax Planning with Roth vs. Traditional TSP

You have the choice between Roth and Traditional TSP contributions. The best choice depends on your tax situation now and what you expect it to be in retirement.

Traditional TSP:

Contributions reduce your taxable income now.
Withdrawals in retirement are taxed as ordinary income.

Roth TSP:

Contributions are made after-tax.
Qualified withdrawals are tax-free in retirement.

You may want to split your contributions between both to create flexibility later. Consider:

Using Roth TSP if you’re in a low tax bracket now but expect higher income in retirement.
Using Traditional TSP if you’re in a high tax bracket now and expect it to drop after retirement.

Planning for Required Minimum Distributions (RMDs)

At age 73, you’re required to start taking minimum distributions from your TSP. This can lead to higher taxable income later in life, especially if you’ve deferred withdrawals.

In 2025, some retirees begin strategizing RMDs earlier to reduce tax burdens. A few key tactics include:

Withdrawing small amounts before age 73 to lower the future RMD balance.
Converting a portion of Traditional TSP to Roth IRAs during lower-income years.
Coordinating TSP withdrawals with Social Security claiming strategies to manage tax brackets.

Failing to plan for RMDs can create unintended tax consequences—so you want to start thinking about this before you’re required to act.

Withdrawal Options You Should Know

When you retire or separate from federal service, TSP gives you several withdrawal options:

Installment Payments – Fixed or based on life expectancy.
Partial or Full Withdrawals – Taken as needed.
Annuity Purchases – Convert your balance into a guaranteed income stream.

Each has pros and cons depending on your goals. For example, installment payments offer regular income but less flexibility. Annuities offer income security but can lock up your balance.

In 2025, flexibility is key. Many retirees choose installment or partial withdrawals, allowing them to adjust based on spending needs or market performance.

Integrating TSP with Other Retirement Income

TSP works best when integrated with your other retirement benefits:

FERS Annuity – A defined benefit that provides monthly income.
Social Security – Available as early as age 62.
Outside Savings and Investments – IRAs, brokerage accounts, etc.

Coordinating these sources can help reduce the risk of running out of money too soon or overpaying in taxes. For instance:

Delay Social Security to boost long-term benefits while relying on TSP early.
Use TSP strategically to fill income gaps or cover irregular expenses.

The right sequence of withdrawals can reduce taxes and preserve assets longer.

TSP Loans and Their Strategic Uses

TSP allows active participants to take out loans against their own savings:

General Purpose Loans – No documentation required; repayment within 5 years.
Residential Loans – For home purchases; repayment within 15 years.

Although loans reduce your invested balance temporarily, they can be useful tools under the right circumstances. Use caution, though:

You’re missing potential investment growth.
Loans must be repaid on time to avoid penalties.
If you leave service with an unpaid loan, the balance becomes taxable.

Loans are best used for unavoidable needs—not discretionary spending.

Roth Conversions: A Strategic Bridge

In certain scenarios, converting part of your Traditional TSP to a Roth IRA can make sense, especially after retirement but before RMDs begin.

Conversion increases your taxable income in the year of transfer.
But it creates future tax-free growth and withdrawals.

This strategy is most effective during lower-income years, such as the gap between retirement and age 73. It’s a long-term tax-saving approach that requires careful planning.

Estate Planning Considerations

TSP accounts pass to designated beneficiaries upon death. But there are smart ways to integrate your TSP into a broader estate strategy:

Keep beneficiary designations up to date.
Consider whether your heirs would benefit more from a direct payout or an inherited IRA.
Plan for taxes heirs might face depending on the type of TSP (Traditional vs. Roth).

Estate planning with TSP isn’t just about who gets what—it’s about how they get it and how much of it stays in the family.

What You Should Be Doing in 2025

If you’re an active employee, retiree, or planning to retire soon, 2025 is a critical year to assess your TSP strategy. Here’s what you should focus on:

Review your contributions – Maximize them based on age-based limits.
Reevaluate fund allocations – Ensure they reflect your retirement timeline and risk tolerance.
Coordinate with your retirement date – Align your TSP withdrawals with Social Security, annuity start dates, and healthcare costs.
Talk to a licensed agent – Complex strategies like Roth conversions or tax-optimized withdrawals benefit from professional advice.

Don’t assume your TSP will automatically meet your retirement needs. Your actions today will shape the lifestyle you can afford tomorrow.

Make the Most of Your TSP—It’s More Than Just a Savings Account

The TSP is a valuable resource, but it’s up to you to treat it as more than just a retirement savings plan. With careful planning, strategic decisions, and professional input, it becomes a flexible tool for tax management, income planning, and legacy building.

To get the most from your TSP in 2025 and beyond, talk to a licensed agent listed on this website for professional retirement planning advice tailored to your goals.

Jeff Boettcher

For over 20 years, Jeff Boettcher has helped his clients grow and protect their retirement savings. "each time I work with my clients, I'm building their future, and there are few things that are more important to a family than a stable financial foundation."

Jeff is known for his ability to make the complex simple while helping navigate his clients through the challenges of making the right investment decisions. When asked what he is most passionate about professionally, his answer was true to character, "Helping my clients – I love being able to solve their problems. People are rightfully concerned about their retirement income, when they can retire, how to maximize their financial safety and future income." Jeff started Bedrock Investment Advisors for clients who value a close working relationship with their advisors.

A Michigan native, Jeff grew up playing sports throughout high school and into college. While Jeff is still an 'aging' athlete, Jeff will take more swings on the golf course than miles running these days. He creates family time, often with weekly excursions to play golf, a hobby he shares with his three young children.

Disclosure: Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.