Much has been spoken and written about the new military blended retirement plan. A key part of this new plan is the Thrift Savings Plan(TSP). The TSP was established in 1986 by Congress and it offers many of the same tax and savings benefits that private corporations offer employees with their 401(K) plans. It was opened up to military members in 2002. While the TSP is similar to those 401(K) plans in many ways it has several advantages that allow it to eclipse the service provided by private 401(K) plans.
In today’s investment environment it is generally common to see managements fees equaling close to 1% of assets. In a rare instance of government efficiency, the TSP has fees from between .026% and .039% depending on which fund you are in. This equates to about $26 to $39 in annual fees on a $100,000 investment account total. At an even modest .75% found in a lot of 401(K)’s you would be paying $750 on that same $100,000. The TSP provides an excellent bargain for military retirement savers.
Simple and Broad.
A common issue with 401(K) investments is contributors chasing returns by exchanging and trading into and out of different investments. Generally, these trades are made at the worst time costing the individual lots of money. Further a lot of times 401(K)’s provides investment choices that are extensive often overwhelming the individual investor who just puts their money into a simple cash account while trying to figure which choice to invest in. The TSP offers 2 types of investments. The first group of investments is age based. The individual picks a fund correlated to their expected retirement and puts all their money into that choice. The second group of funds are 5 funds which generally correlate to commonly accepted bench marks. For instance, the C fund generally tracks the S&P 500 Index.
The TSP allows most of the same features as 401(K) plans. Members under the age of 50 can save up to $18,000 annually to it and if they are over 50 they can save up to $24,000 to the plan. The combined maximum of member contributions plus agency matching contributions is $54,000, a number that is very hard to reach given the matching plans currently being considered.
The TSP also allows in-service loans. These loans must be taken while the member is still in the service as the payments are taken as an allotment from your payment. If a loan still has a balance at retirement or separation from service, the loan will be payable in full or taxed and penalized as an early distribution. Loans can be taken for up to $50,000, they are payable over 5 or 15 years depending on the circumstances surrounding the loan.
The TSP has a full range of withdrawal options. The choices include lump sum payments, different methods of annuitized payments and transferring to an Individual Retirement Account (IRA) or new employees retirement plan. These funds are withdrawn penalty free if withdrawn after age 55.
The Roth choice.
The final excellent point of the TSP is the ability to characterize your contributions as “Roth” contributions. The Roth choice provides an investment that you can withdrawal during retirement tax free. For this choice you lose the upfront benefit of taking a tax deduction for your contribution but your overall gain far exceeds the value of that deduction. You cannot convert any amount of your existing TSP balance to a Roth TSP type you can only contribute to a Roth TSP through payroll deductions.
The TSP provides an excellent resource to today military members. As the new blended retirement system becomes reality the service members understanding of how the TSP works will become essential.