Understanding the military thrift savings plan essentials
The Thrift Savings Plan (TSP) is the government long-term retirement savings and investment plan, similar to a civilian 401(k). Together TSP, Social Security, and military pension make up the three pillars of the military retirement system. Service members can make voluntary contributions to TSP through automatic payroll deductions. If you are in the Blended Retirement System (BRS), you will receive contributions paid by the military into your TSP account as well. These contributions are invested for you and are intended (but not guaranteed) to grow over time and provide you with income in retirement.
Contribute
Service Contributions – BRS members (only) receive an automatic contribution by the military to their TSP account every month equal to 1% of your basic pay, regardless of whether you make any contributions yourself or not. This money becomes yours (vested) after two years in the service.
Payroll deduction – BRS members who began or rejoined service on January 1, 2018 or later are automatically enrolled in TSP. 3% of your basic pay is automatically deducted from your paycheck every month and deposited in your TSP account. You can change your contribution if you want. Everyone else must proactively elect their own TSP contributions. For 2020 you can contribute up to $19,500 to your TSP. Service members age 50 or older can make an additional $6,500 Catch Up contribution each year.
Service Matches – BRS members (only) also receive matching contributions (additions to your TSP account) on the first 5% of the pay you contribute each month.
TSP Essentials Tip – Steady Wins the Prize. Matching contributions for BSR members are made month-to-month. If you elect to make large payroll contributions int the beginning of the year and hit the annual limit early, you could lose out on matching contributions later in the year. Consider spreading your payroll contributions out evenly to the end of the year to get all your due.
TSP Essentials Tip – Don’t Leave Money on the Table. BRS members should consider increasing your contributions to at least 5% so you get the full-service match.
Pay Taxes – Or Not
There are two kinds of TSP accounts, Traditional and ROTH. Services will make the automatic and matching contributions for BSR members to their Traditional TSP account. You can choose to make your contributions to a Traditional or ROTH TSP account. The main difference between the two is how they are taxed.
Traditional TSP -Traditional TSP contributions that you make reduce your taxable income, so the amount of taxes that come out of your paycheck now are less. When you withdraw money from TSP, usually in retirement, the entire amount (contributions and investment earnings) is taxable as regular income. For many people their tax rate in retirement will be less than when they’re working and they would pay less taxes overall with a Traditional TSP.
ROTH TSP – With ROTH TSP you pay taxes now on your contributions just like regular income. But when you withdraw money from your ROTH TSP it is completely tax-free (including earnings) as long as it’s withdrawn at least five years after your initial Roth contribution and you are at least 59 1/2 years old, permanently disabled, or deceased.
Tax-exempt contributions – Contributions you make to Traditional TSP while earning tax-exempt pay in a combat zone are not taxed when you make the contribution or when you withdraw it. However, the earnings that grow in your Traditional TSP will be taxed as normal income when you withdraw it. For contributions you may make to a ROTH TSP with tax-exempt pay, the contributions AND the earnings are completely tax-free as long as you meet the withdrawal requirements in the ROTH TSP paragraph. Servicemembers 50 and older can make catch-up contributions with tax-exempt pay only to a ROTH TSP. Catch-up contributions to a Traditional TSP cannot be made with tax-exempt pay.
TSP Essentials Tip – Pay Now, Pay Less. Service members with lower income, such as early in your career, should consider making ROTH TSP contributions. If your tax bracket is lower now than when you retire, you will pay less tax in total with the ROTH.
TSP Essentials Tip – Pay No Tax. You should consider making your TSP contributions to ROTH TSP while you’re deployed to a combat zone. As long as you meet the ROTH withdrawal requirements (59 ½ and 5 years), both the contributions you make to ROTH TSP with tax-exempt pay and the earnings that grow over the years are not taxed. Ever.
Invest Two Ways
TSP offers you two ways to invest your money. The first way is with “Lifecycle” L Funds. These funds are a professionally designed mix of stocks, bonds, and government securities. You select your L Fund based on your “target date,” the year in the future that you plan to start withdrawing your money. Depending upon your plans, this may be as soon as you leave the service or further in the future. The second way is to invest in individual TSP funds. This way you make your own decisions about your investment mix by choosing from any or all of the individual TSP investment funds (G, F, C, S, and I Funds).
When you start TSP contributions, you designate which TSP Funds you want your contribution to go to. If you are a BRS member and do not make a selection, all contributions TSP receives for you will go into an L Fund appropriate for your age.
L Funds – Your target year is when you will expect to start withdrawing money from TSP. For example, the TSP Fund L 2040 has a target year of 2040 and is designed for those who will begin withdrawals in years 2035 through 2044. L Funds assume that if you who won’t need your money for quite a long time, you are able to tolerate more risk (ups and downs) while seeking an overall higher return (increase in value).
The L Funds invest in mix of individual TSP investment Funds (G, F, C, S, and I Funds) and automatically adjust the mix to reduce risk (and returns) as you get closer to your target year. If the target year is a long time from now, that L Fund will be more exposed to risky assets, such as stocks in the C, S, and I Funds. The L Income Fund is designed for those who are already withdrawing from TSP and offers lower risk and lower growth. As the value of stocks and bonds go up and down, each of the L Funds is automatically rebalanced to restore its intended investment mix. In practice this rebalancing forces the L Funds to “buy low and sell high” for you each business day, boosting your return and while maintaining the same level of risk.
TSP Essentials Tip – Rebalance. For those of you in L Funds your set, TSP rebalances for you. If you choose to invest in the individual TSP Funds, you can rebalance among any of the TSP funds yourself up to 2 times a month. Determine what target percentage of each fund you want to maintain, then periodically log into TSP and do an inter-fund transfer by typing in your target percentages.
Individual Funds – TSP has five individual funds you can invest your TSP dollars in. The Government Securities Investment (G) Fund is invested in short-term U.S. Treasury securities. This is the only fund that guarantees you will not lose money. Your contributions (principal) and interest are guaranteed by the U.S. Government. The trade-off is the growth in value will be quite low and might not keep up with inflation.
Each of the other four individual funds (F, C, S, and I Funds) are invested to track separate market indexes. For example, the Common Stock Index (C) Fund seeks to invest in the same stocks as the Standard & Poors (S&P 500) Stock Index. This index includes 500 large companies that trade on U.S. Stock Exchanges. One dollar you invest in the C Fund buys you a tiny portion of each of those large companies. This helps reduce (but not eliminate) your overall risk by diversification, that is “putting your eggs” in many, many baskets.
The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund, and tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index. The International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries and tracks the MSCI EAFE (Europe, Australasia, Far East) Index. The Fixed Income Index Investment (F) Fund invests in a government, corporate, and mortgage-backed bonds U.S. Bonds and tracks the Bloomberg Barclays U.S. Aggregate Bond Index.
TSP Essentials Tip – All L Fund or None. The L Funds are already made up of the five individual TSP funds (G, F, C, S, and I Funds), so you will duplicate your investments if you invest in an L Fund and the individual TSP funds at the same time. Consider choosing only an L Fund for simplicity and hands-off investing, or build and mange your own custom portfolio from among the other G, F, C, S, and I Funds.
TSP Essentials Tip – Early Bird Gets the Worm. Making and maintaining investment choices can seem intimidating. Don’t let that keep you from getting started. You can start now with an L Fund, let the pros work it for you, and start watching your nest egg grow. As your knowledge and confidence grows, you can always make changes and take more control if you want to.
Withdrawals
Retirement – TSP is a qualified retirement plan designed for long-term saving for retirement. You will be able to make retirement withdrawals from TSP once you reach age 59 ½. Generally, if you withdraw money before that time, you will be hit with a 10% penalty, in addition to any taxes due. When you are eligible, you will be offered a choice of regular “installment” payments from your balance, a single lump-sum payment, or purchasing an annuity that guarantees a set monthly benefit for life to you (or your survivor).
In-service – There are two types of withdrawals you can make while you are still in the service, financial hardship and age based “59 ½”. You can make a financial hardship withdrawal if you
can certify you have a financial hardship as a result of a recurring negative cashflow, legal expenses for separation or divorce, medical expenses, or a personal casualty loss. You can only withdraw contributions you made and earnings on those contributions. You can request $1,000 or more; but, the amount cannot exceed the actual amount of your certified financial hardship.
You can make age-based in-service withdrawals any time after you reach age 59½. You can withdraw it all, or part of your account balance up to four times per calendar year.
TSP Essentials Tip – Don’t Eat Your Seed Corn. Early TSP withdrawals can have steep penalties and taxes due. Even penalty-free withdrawals permanently deplete your retirement savings and any future earnings those saving would have made. Consider building an emergency fund and separate accounts for short-term savings that you can tap when you need it. Then your retirement savings will still be there when you need it.
Loans – You can borrow up to $50,000 of your contributions from your TSP account while you are still in the service. There is a $50 processing fee and most loans must be paid back with interest within 5 years. You can get up to 15 years to pay back a loan for a primary residence. If you don’t pay your TSP loan back on time, there will be a 10% withdrawal penalty and the IRS will charge you income tax.
End Note
It’s never too early to start saving for retirement. The key to growing a mighty oak from a seed? Time. Even small amounts put away now will have a major impact on your financial future. Start by tracking your income and expenses, making a spending/saving plan (budget), and then carving out some TSP contributions to seed your future.
One “Final” TSP Essentials Tip – Name a Beneficiary. A beneficiary is the person (or people) that will receive your TSP funds when you die. If you have not designated someone as your beneficiary for your TSP, government law determines who gets it. You can designate the beneficiary you want with TSP, just be sure to update it with life changes like a marriage or divorce.
For more information on TSP, go to www.tsp.gov