Written By:
Max Michalczik CFP® | Space & Defense
Kekoa Pfau ChFC® | Space & Defense

What is the difference between a 401(k) and the TSP for defense professionals?

Federal civilian employees and active-duty military contribute to the Thrift Savings Plan. Defense contractor employees use employer-sponsored 401(k) plans. Both are defined contribution retirement accounts with similar mechanics, but the specific rules, investment options, and employer contributions differ enough that they require separate consideration.

A significant portion of the defense workforce transitions between government and contractor roles during a career. Someone who spends 10 years as a federal civilian and then moves to a prime contractor will have a TSP account and eventually a 401(k) account running in parallel, or in sequence. Knowing how to manage both, when to roll one into the other, and when not to, is an important financial planning consideration for this career path.

How does the TSP work for federal civilian employees and military members?

The TSP is available to federal civilian employees under FERS or CSRS and to active duty and reserve military. For FERS employees, the government contributes 1 percent of salary automatically and matches contributions dollar for dollar up to 3 percent, then 50 cents on the dollar for the next 2 percent. The maximum government contribution is 5 percent if you contribute at least 5 percent yourself.

• FERS employees should contribute at least 5 percent to get the full match. Anything less leaves free money on the table.
• Military members under the Blended Retirement System receive matching contributions after two years of service, up to 5 percent.
• CSRS employees do not receive any matching contributions. TSP is entirely self-funded.
• Both Traditional and Roth TSP options are available.

The TSP has some of the lowest expense ratios of any retirement plan in the country, often below 0.05 percent. Over a 30-year career, that difference in fees alone is worth tens of thousands of dollars compared to higher-cost alternatives.

What are the TSP fund options and which should you choose?

The TSP keeps the menu simple: five core funds and a series of lifecycle funds that combine them automatically.

• G Fund: Government securities. Cannot lose principal and earns a rate set by law based on medium and long-term Treasury yields. Not available anywhere outside the TSP.
• F Fund: Tracks the Bloomberg U.S. Aggregate Bond Index.
• C Fund: Tracks the S&P 500.
• S Fund: Tracks small and mid-cap stocks not in the S&P 500.
• I Fund: Tracks international developed market stocks.
• L Funds: Lifecycle funds that automatically adjust allocation based on your target retirement year. A solid default for most investors who do not want to manage the mix themselves.

The G Fund is genuinely unique. It earns a return similar to intermediate-term Treasuries but with principal protection that Treasury funds in a regular brokerage do not offer. It exists only inside the TSP. For federal and military retirees approaching, or in, retirement keeping a meaningful allocation in the G Fund is one of the strongest arguments for maintaining a TSP account rather than rolling everything to an IRA.

How does a 401(k) work at a defense contractor and what should you look for?

Defense contractor 401(k) plans vary widely. The matching formula, vesting schedule, and investment fund quality all affect the real value of the benefit.

• Match formula: Know exactly how the match works and contribute enough to capture every dollar of it.
• Vesting schedule for the match: Some vest immediately. Others vest over two to six years. This matters if you are considering a move.
• Fund quality and expense ratios: Low-cost index funds should be available. High-fee active funds can quietly drag down overall returns.
• Roth 401(k) option: Increasingly common and valuable for tax diversification.
• After-tax contribution option: Opens the door to the mega backdoor Roth strategy if the plan also allows in-plan Roth conversions.

Raytheon, Northrop Grumman, L3Harris, Leidos, Booz Allen Hamilton, and General Dynamics have historically offered competitive 401(k) matching. When evaluating a job offer in this sector, calculate the annual value of the match and include it in your total compensation comparison. It is real money.

What is the difference between a Traditional and Roth 401(k) or TSP?

Traditional contributions go in pre-tax. You defer taxes until you begin taking withdrawals in retirement. Roth contributions go in after-tax. No tax deferral now, but qualified withdrawals in retirement most likely will be tax-free.

Defense professionals who transition from federal service into contractor roles often see their income jump significantly. The year of that move can be a good time to evaluate contribution type. High earners in peak years often benefit from Traditional contributions. Professionals earlier in their career or in a temporarily lower-income period often benefit from Roth. A split between both is a reasonable default when the future trajectory is uncertain.

How much can you contribute to a 401(k) or TSP in 2026?

The employee contribution limit is $24,500 for 2026. If you are 50 or older, you can add a catch-up contribution of $8,000 for a total of $32,500. One important change for 2026 under SECURE 2.0: employees aged 50 and over, who earned more than $150,000 in the prior year, must make their catch-up contributions as Roth contributions, rather than pre-tax. Employer matching does not count against your personal limit. The combined employee-plus-employer limit is $70,000.

What happens to your TSP or 401(k) when you transition between federal and contractor roles?

You have options when you leave an employer. You can roll your balance into your new employer’s plan, roll it into a traditional IRA, leave it in the old plan (if allowed), or cash it out. That last option is almost always the wrong choice. Taxes plus a 10 percent early withdrawal penalty before age 59-and-a-half can consume a third or more of the balance.

Before rolling a TSP out of federal service, think carefully about whether you want to give up G Fund access. Many advisors recommend keeping at least some assets in the TSP after separation specifically to maintain that allocation option. You cannot replicate the G Fund in an IRA or private sector 401(k).

---

This content is for educational and informational purposes only and should not be considered personalized investment, tax, or legal advice. The information provided is general in nature and may not apply to your individual circumstances. All investments involve risk, including the potential loss of principal.
The Freyr Group, LLC does not provide legal or tax advice. Any references to tax-related topics are provided for general informational purposes only, and individuals should consult with a qualified tax professional regarding their specific situation.
For additional information, please review our full disclosures.