How To Invest Your TSP

Capital Financial Planners |

For most Federal employees, their TSP is their primary (if not only) investment vehicle. For those of you who aren’t Federal employees, your company may have a different company-sponsored plan, like a 401(k), but the concept holds true. 

Because these sponsored plans are offered as an employee benefit and offer matching provisions to incentivize employees, they are a hugely popular way for people to get exposure to the investment world. 

 However, although employer-sponsored plans are a fantastic benefit, they are only as effective as the investments held within them. This poses a challenge to the average employee who doesn’t know which funds to choose. 

 In order to gain a better understanding of how to invest your TSP, let’s break down how the accounts work. 

TSP Basics

The TSP, along with other company-sponsored retirement plans, was created to allow employees to save and invest for their retirement. Since the FERS pension system has a lower benefit than the old CSRS system, the government set up guidelines that would incentivize employees to contribute to their own retirement.

The first tool – that you’re probably already familiar with – is the contribution matching provision. With this rule, the government matches employee contributions to their TSP. The TSP matching provision looks like this:

  • You get a 1% automatic contribution from your agency.

  • For the first 3% that you contribute, your contribution gets matched dollar for dollar.

  • For the next 2% that you contribute, your contribution gets matched 50 cents on the dollar.

In other words, to get your full 5% contribution from the government, you must also contribute 5%.

On top of the matching provisions, the TSP also has tax benefits. Contributions into the traditional side of the TSP are done on a pre-tax basis, meaning they are taken out of your paycheck before you pay taxes on them. 

 Then, your account is able to grow over time without paying any taxes on the increase in value. The only caveat is that, when you decide to pull money out, you have to pay income tax on the entire amount withdrawn. The TSP also has a Roth provision that allows you to put after-tax money into the TSP. The growth in the account still happens tax-free, and you are not taxed on the withdrawals since you have already paid taxes on that money.

 Investment Options

A TSP is just an account that applies the aforementioned tax rules to your money. You must decide how to invest the money within the account. The TSP has a list of investment funds that are able to be held, and employees select what portion of their contribution they would like to go to each fund. 

This is where most people get confused, and potentially pick the wrong investment funds for their situation. So, let’s cover the options.

 Lifecycle Funds

This is where most people end up putting their money because it seems to be pretty straightforward. There are a range of funds with dates behind them (L2030 for example), that correspond to your planned retirement date. 

 These funds are invested in a way that traditionally makes sense for someone with the corresponding time to retirement. A 2050 fund will be more aggressive and mostly invested in equities since that person has 30 years until retirement. A 2030 fund will have more conservative investments. 

 Although the lifecycle funds offer an extremely simple way to invest, they may not be the best fit for everyone. 

 Individual Fund Selection

 The TSP offers five different individual funds - C Fund, S Fund, I Fund, F Fund, and G Fund. Each of these funds offers exposure to a different part of the stock or bond market. It’s also important to note that each of the Lifecycle funds listed above is made up of an allocation of these five individual funds. 

 C Fund - This is an S&P 500 index fund, meaning it invests in the 500 largest companies in the U.S. It has the best historical returns of all of the individual funds, and we normally recommend it as the largest portion of an investor’s stock exposure. 

 S Fund - This fund invests in small companies in the U.S. and is most similar to the Russell 2000 Index. Although the S Fund takes more risk than the C Fund, it can be a great fund to have to add some diversity to your stock holdings.

 I Fund - This fund invests in international markets. Historically, it has underperformed both the C and S Funds, while taking more risk. It may be a good diversification tactic to have some international exposure going forward, but historically, a heavy allocation to the I Fund has not paid off. 

 F Fund - This fund invests in corporate bonds and closely follows the Barclays Aggregate Bond index. Historically, it’s a relatively stable investment and typically pays a higher rate than the G Fund over time.

 G Fund - This is the government securities fund and essentially acts like cash in the account. It pays a marginal interest rate, and is extremely stable. This can be a good option for money that you know you may need in the next 3-5 years. 

 So which funds should you pick?

It all depends on your current situation and your risk tolerance. The more of the stock funds (C,S and I), you have in your portfolio, the more volatility you will see from year to year. But you’ll also likely see the highest returns over the long run.

 More of the bond funds (F and G) will lead to lower returns over time, but a more stable investing experience with less ups and downs. 

 For the stock portion of your portfolio, history would tell us that the C Fund is the most reliable place to have your money. We recommend also including the S Fund (in a smaller percentage) to add some diversification. The I Fund hasn’t really proven itself historically, but could be added in for an extra layer of diversification, especially for more aggressive investors. 

 For most investors, the bond portion of your portfolio should center around the F Fund. This will provide you with relatively stable returns that are higher than the G Fund. A portion of your money can still be allocated to the G Fund for absolute stability. For ultra-conservative investors, your G Fund allocation may be higher. 


Once you’ve picked your individual investments, it’s important to check in from time to time to make sure the allocation still looks like how you planned it. Asset classes tend to move in cycles, meaning that over time, certain investments will outperform others, and you may need to rebalance your funds. 

 Investment selection within your TSP is important, but don’t let it scare you away from investing altogether. Retirement plans are one of the best investment tools offered to us, and we should all take advantage of them if we can. 

 And if you need help making the decision, we’d love to give you our input. 

 Go to to book your complimentary call.