3 Reasons TSP Is an Awesome Military Retirement Back-Up Plan

Editor’s Note: The Thrift Investment Board announced in November 2014 that all Roth contributions to the TSP by active duty Air Force, Army and Navy members will stop on January 31 unless action is taken. Contributions must be changed from a dollar amount to a percentage amount. The new requirement takes effect January 1 and service members will have until the end of the month to make the change in myPay.  

You’ve got this retirement savings thing covered, right? Your spouse is going to put in 20+ years and then collect a military pension for the rest of his or her life. Bam, retirement (and health care) taken care of in 1 fell swoop. The truth is that only about 17 percent of service members stay in long enough to collect retired pay and with further reductions in force planned, that number could drop even lower.

You need a retirement back-up plan.

3 Reasons TSP Is an Awesome Military Retirement Back-up Plan

Fortunately, the federal government already has one in place: the Thrift Savings Plan (TSP). Run by an independent government agency called the Federal Retirement Thrift Investment Board, the TSP is very much like a 401(k) that a civilian workplace might offer to employees. In fact, the TSP has been called “easily the best 401k retirement plan in the country.”

Why is the Thrift Savings Plan so awesome?

  1. Super low fees. The average fee is only .029 percent, which translates to 29 cents per $1,000 invested. That means more of what you contribute actually gets invested. Compare that to the average stock mutual fund that an investor can buy on his or her own, where the fees can be up to fifty times more. Yikes.
  2. Elementary, my dear. There are only 5 funds to choose from plus 5 “lifecycle” funds, which are a mix of the 5 basic funds tailored to a specific time horizon (the further away your retirement date is, the more aggressive and growth-oriented the fund mix will be). Choose a lifecycle fund that matches your retirement plans and let the TSP fund managers figure things out or pick your own fund mix.
  3. Will you have tax or no tax with that? In 2012, the TSP started offering military members a choice of whether they wanted to contribute to the Traditional TSP or the Roth TSP. The Traditional option allows income to grow tax-deferred, meaning that taxes will be paid on future distributions once you retire. The Roth option, on the other hand, comes out of post-tax money, so there will be no taxes due on it when it is withdrawn in retirement.

The Roth option has proven very popular with the military– while service members only account for 15 percent of the federal government’s TSP accounts, they account for 46 percent of Roth accounts. The Roth’s tax benefit is especially attractive for junior military members, who probably can expect that they will be in a higher tax bracket in the future.

In 2014 service members can contribute up to $17,500 of basic pay, incentive pay, special pay or bonuses to the TSP, choosing the Roth, the Traditional or a mix of both. The limit on pay from combat areas rises to $52,000, but this is only for contributions to the Traditional TSP option. Limits on the Roth option from combat areas remain at $17,500.

Related: Tax Time Toolkit for Military Spouses

Service members can keep their money in the TSP even after they retire from the military. In fact, it’s even possible to roll outside retirement accounts from other employers *into* the TSP to take advantage of those low management fees.

Reasons Why TSP is an awesome military retirement back-up plan

How Can You Participate?

Congress changed the law so that civilian federal employees have been automatically enrolled in the TSP since 2009. But the defense department has resisted doing the same for military members. Currently just under 40% of military members participate in the TSP.

Even though enrollment is not automatic for the military, the process is actually fairly simple and can be done through myPay whether you are on active duty or a reservist. You must elect to contribute at least 1 percent of your basic pay to either the Roth or Traditional TSP. Service members can also use myPay to start, stop or change the contribution amount.

Initial contributions automatically go into the conservative and “safe” G fund, which is made up of treasury securities that are specially issued to the TSP. But service members can log into their TSP account and change where future contributions will be allocated as well as make interfund transfers of current holdings.

The TSP website, as with many government sites, isn’t extremely user-friendly. There’s a lot of information on there, but it’s buried. Fortunately, in addition to an automated phone help line, they maintain the ThriftLine where you can talk to a live representative Monday through Friday.

The main thing, though, is to think about getting started saving for your future, so that even if your significant other leaves service before putting in 20 years, there will be something to show for it.

Is your service member taking advantage of the benefits of TSP? 

 

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