Podcast 001 – Thrift Savings Plan Basics & Why You Should Participate

The Military Wallet Podcast on iTunesMilitary members and many government employees have access to pension plans, which are fast becoming hard to find in the civilian sector. But even if you qualify for a pension plan, will it be enough to finance your retirement, or will you need additional savings and investments? The answer, as you have probably guessed, is that most people will likely need more money to fund a lifestyle that is equivalent to their current way of life. That’s where other retirement plans come into play. The most notable among these for military members and government employees are the Thrift Savings Plan, and IRAs.

Thrift Savings Plan Basics - Military Wallet Podcast

The TSP is a great way to save for retirement!

The Thrift Savings Plan and IRAs are both great options for investors, and I’m going to walk you through the basics of these plans, along with our guest, Robert Shaye, an active Duty Coast Guard member, and a recent MBA graduate from UC Berkeley Haas. Robert shares some excellent information about the TSP, investing, and how you can accomplish your retirement goals.

Covered in this episode are topics including:

  • Why you should save for retirement.
  • How Robert helped a friend put over $450,000 back in her pocket by making some small changes to her retirement account.
  • The differences between the Thrift Savings Plan and IRAs.
  • The difference between Roth and Traditional Retirement accounts.
  • Why the Roth IRA and Roth Thrift Savings Plan options are often the best choice for military members.
  • Thrift Savings Plan contribution limits.
  • Roth IRA and Traditional IRA contribution limits.
  • How to open your Thrift Savings Plan account.
  • Where you can open a Roth IRA.
  • How to get started investing, even if you don’t know how or where to get started.
  • Investment options within the Thrift Savings Plan, and how they differ from IRAs and other investment accounts.
  • The importance of investment management fees, and how they will impact your investments over time.
  • The pros and cons of Life-Cycle, or Target Date Funds.
  • Why it’s important to keep your money invested in stocks, even when the markets aren’t doing well.
  • Pros and Cons of transferring funds in or out of the TSP.
  • Strategies for Guard Members or Reservists who are also Federal Employees and are eligible for both versions of the Thrift Savings Plan, the civilian and Uniformed Services.
  • Strategies for investing in the TSP when you have tax-exempt combat pay (this can have a huge impact!).
  • Why you might want to open a TSP with a minimum of $500, even if you don’t plan on making the TSP your primary retirement account (this strategy can literally put thousands of dollars back in your pocket due to the low fees the TSP charges!).

Summary:

The Thrift Savings Plan is fairly easy to understand and even easier to start. It’s never too late, or too early, to begin investing. And the TSP is a great way to start saving for your retirement. You can get started through your MyPay account if you are in the military, or contact your finance unit for assistance.

More to come: The Thrift Savings Plan is fairly basic as far as retirement and investment accounts go. But as basic as it is, there are some advanced strategies you can use to supercharge your retirement plan. We will be sure to address some of these topics in future podcast episodes.

Note: This is our first episode. We plan on making this a weekly event. We will be on iTunes, Stitcher Radio, and other outlets soon. Thanks!

Questions or comments? Drop us a line in the comments section and we will be sure to get back with you!

2014 Thrift Savings Plan Contribution Limits

Thrift Savings Plan officials recently release the 2014 Thrift Savings Plan Contribution Limits, as stated by the TSP. Thrift Savings Plan contribution limits are calculated on an annual basis and can change based on rules set by the IRS. There is no change to the TSP contribution limits for employee deferrals or for catch-up contributions, which continue to be $17,500 and $5,500, respectively. (Catch-up contributions are only available to persons aged 50 and up).

Thrift Savings Plan Contribution LimitsThe following chart displays the 2014 Thrift Savings Plan contribution limits, with notes about each type of contribution. The combined maximum one can contribute, including all agency matching contributions or contributions from special pay and bonuses, is $52,000 ($57,500 for those who are eligible for catch-up contributions).

2014 Thrift Savings Plan Contribution Limits

2014 Thrift Savings Plan Limits
Max Contribution Notes
Elective Deferral Limit* $17,500 Elective deferral contributions only apply to regular employee contributions that are made in before-tax (i.e., tax-deferred) dollars. For members of the uniformed services, this includes all tax-deferred contributions from taxable basic pay, incentive pay, special pay, and bonus pay.
Max Annual Addition Limit $52,000 An additional limit imposed on the total amount of all contributions made on behalf of an employee in a calendar year. Uniformed service members become subject to this limit when tax-exempt contributions are made to their TSP accounts. This limit includes employee contributions (both tax-deferred and tax-exempt), Agency Automatic (1%), and Agency Matching Contributions.
Catch-up Contribution Limit $5,500 The maximum amount of catch-up contributions that can be contributed in a given year by participants age 50 and older. It is separate from the elective deferral and annual addition limit imposed on regular employee contributions.

Historic Thrift Savings Plan Contribution Limits

Year Annual Contribution Limit Max Catch-Up Contribution Limit Annual Addition Limit Annual Addition Limit w/ Catch-Up
2007 $15,500 $5,000 $46,000 $51,000
2008 $15,500 $5,000 $46,000 $51,000
2009 $16,500 $5,500 $49,000 $54,500
2010 $16,500 $5,500 $49,000 $54,500
2011 $16,500 $5,500 $49,000 $54,500
2012 $17,000 $5,500 $50,000 $55,500
2013 $17,500 $5,500 $51,000 $56,500
2014 $17,500 $5,500 $52,000 $57,500

Types of Thrift Savings Plan Contributions

There are two types of TSP contributions:

  • Regular employee contributions (including automatic enrollment contributions)
  • Catch-up contributions (for participants age 50 or older)

Regular contributions. Eligible TSP participants can begin making regular employee contributions at any time. These contributions are made from basic pay before taxes are withheld. Your contribution will remain in place until you elect to stop or change the contribution amount, reach the contribution limit, or take a Thrift Savings Plan financial hardship withdrawal.

Catch-up contributions. Catch-up contributions are only available to those age 50 and above. To make catch-up contributions, you must first contribute the maximum amount of regular employee contributions, for the year, the elect to make catch-up contributions. Your catch-up contributions will stop automatically when you reach the contribution limit or at the end of the calendar year. You will need to elect to make  catch-up contributions each calendar year.

Uniformed Services TSP Contributions

The Thrift Savings Plan is available to all military members. Military members are eligible to contribute any whole percentage of basic pay, as long as the annual total of the tax-deferred investment doesn’t exceed the maximum contribution limit. Military members also have the option of contributing any portion of their incentive pay, bonuses, or special pay so long as they contribute a portion of their basic pay.

Roth TSP Contributions for TSP members. Roth Thrift Savings Plan contributions are limited to the $17,500 elective deferral limit. All additional contributions toward the Annual Additions Limit must be made into a Traditional TSP account, even if the contributions come from tax-exempt pay.

Tax free combat zone contributions. Military members serving in tax-free combat zones are allowed to contribute up to $52,000. This total includes regular deferred contributions, tax-exempt combat zone contributions and special pay and bonuses.

Note regarding catch-up contributions and tax free pay: Military members who are receiving tax-exempt pay while serving in an eligible combat zone must make catch-up contributions into a Roth Thrift Savings Plan account.

TSP Federal Agency Contribution Chart

FERS Employees receive an automatic 1% contribution from the federal government, then a 100% match for the first 3% they contribute, followed by an additional 0.5%  match for the next 2% the contribute, bringing the maximum agency contribution to 5%. Federal employees can contribute as high of a percentage of their salary as they wish, so long as they don’t exceed total contribution limits, including the catch-up limits allowed for those age 50 and above.

The following chart can be used by Federal Employees to determine the total amount of their contributions including agency match.

TSP Agency Contribution Chart

TSP Agency Contribution Chart

Other notes about TSP contributions

The following information should help you determine how to allocate your TSP contributions:

  • Contributing by percentage of pay. If you elect to contribute a percentage of pay to the TSP and the amount is more than your remaining salary after mandatory deductions (e.g. Federal income tax, state taxes, TSP loan payments, etc.) and other voluntary deductions that are processed before TSP contributions, then the resulting pay will be the amount withheld and contributed to your TSP account.
  • Contributing by dollar amount. If you designate a whole dollar amount that is greater than your remaining salary, then no employee contributions will be made for that pay period, and if you are FERS you will not receive Agency Matching Contributions for that pay period. If this occurs, you will need to lower your contribution level by electing to contribute either a lower percentage or dollar amount. No TSP contributions will be withheld from your pay until your new election is effective. Neither the new election or any matching contributions will be applied retroactively.
  • Automatic contributions. The Thrift Savings Plan recently began Automatic TSP Contributions for New Employees.
  • Roth TSP. The Roth TSP account is on it’s way and should be here within a year. Here is more information about the Roth Thrift Savings Plan (TSP).

The Thrift Savings Plan is a great opportunity to save money for retirement and you should take advantage of it if you are eligible to participate. You can read more about the contribution rules at the TSP page.

Thrift Savings Plan (TSP) Life Annuity Guide

One of the biggest financial decisions military and government retirees face is what to do with the funds in their Thrift Savings Plan (TSP). Participants in the TSP have multiple options when they leave government service. These options give you a lot of flexibility with your future and your decision should be based on many individual factors. For example, if you have enough monthly income through your pension(s), Social Security, and other income streams and investments, you may be able to leave your funds in the TSP to continue growing. You can also elect to transfer those funds to another retirement account. Of course, you may also find that you will need to tap into your TSP funds to pay your living expenses during retirement.

There are a few ways you can do that, including taking a lump sum withdrawal, electing to withdraw a fixed amount from your portfolio each month, or, if you prefer a little more stability, you can elect to purchase an annuity with the funds in your TSP account. Or you can choose do a combination of these withdrawal options. We have covered most of these topics in previous articles, but we haven’t done a detailed explanation of the TSP Life Annuity option, which we will cover here.

What is the TSP Life Annuity?

An annuity is simply a fixed payment made to someone over a specific time period, usually on a monthly or annual basis, and often for the remainder of their life. Annuities are normally purchased from insurance companies, which then invest the money and pay you a monthly amount based on your agreement at the time of purchase (there are many factors that go into how much an annuity will pay out). The Thrift Savings Plan Life Annuity is managed by MetLife Insurance Co, which has been running the TSP annuity program since its inception.

TSP Life Annuity Eligibility: According to the TSP website: You are eligible to purchase a TSP life annuity if you:

  • Are separated from Federal civilian employment or the uniformed services
  • Purchase an annuity with $3,500 or more of your vested account balance (applies to traditional and Roth balances separately)

Types of TSP Life Annuities – Single and Joint

There is no one-size-fits-all annuity, even with the options available to TSP participants. There are many options you can choose when deciding how to purchase your annuity. And as you might imagine, the options you choose will affect your monthly payout. Let’s look at the annuity options available to you through the Thrift Savings Plan:

A Single Life Annuity covers only the individual. When the person who buys the annuity passes away, the payments stop.

A Joint Life Annuity covers the individual and their spouse or another person you choose to be a joint annuitant. If the joint annuitant is not your current or former spouse, they must be a close relation who has an insurable interest in you (usually meaning that they stand to benefit financially from your continued living).

Payments in a joint annuity will continue as long as at least one of the members of the joint annuity is still living. There are two types of joint annuities:

  • 50% Survivor Annuity. The 50% Survivor Annuity option pays out half the original monthly payment after either person passes away, whether the survivor is the principal member, or the joint annuitant. If you name a joint annuitant other than your spouse who is more than 10 years younger than you, you must choose a joint life annuity with the 50 percent survivor benefit. 
  • 100% Survivor Annuity. The 100% Survivor Annuity pays out the same amount of money each month after one of the members dies, regardless of whether the annuitant or the joint annuitant dies first. The 100% Survivor Annuity typically pays less per month than the 50% Survivor Annuity.

TSP Life Annuity Payment Options

You have two options regarding your monthly annuity payments – level and increasing.

  • Level payments are a fixed monthly payment that doesn’t take inflation into account. If your payment is $1,000 a month in year one, it will remain that way until the annuity has run its course.
  • Increasing Payments can increase with the Consumer Price Index (CPI). However, annual increases are capped at 3%, regardless of how much the CPI increases in any given year. On the flip side, your annuity will never decrease. (Deflation is very rare, so chances are good your annuity will increase in value in most years, even if it is only a small increase). Increases are assessed each year on the anniversary of your first annuity payment. So if your annuity starts at $500 a month, it will never go lower than that amount, and each year it can compound to a higher monthly payment.

When choosing between these two options, it’s important to note that the Level Payment Option usually starts out at a higher monthly payment than the Increasing Payments Option. But the Increasing Payments option has the opportunity to grow larger over time. You will have to run some numbers and look at other factors to determine which is the better solution for you. Note: The Increasing Payments option is not available to joint annuitants that aren’t a spouse; only the Level Payments option is available.

Annuity Features for Beneficiaries

The What-if? factor often plagues people when they are considering an annuity. You may say to yourself, “What if I die before the annuity has paid out much money? I would have been better off not buying it and leaving my money in a different investment!”

That is a rational thought, and you wouldn’t be alone thinking it. The TSP Annuity allows annuitants to name a beneficiary or beneficiaries on their TSP Withdrawal form. There are two options available, the Cash Refund Option and the Ten-Year Certain Option.

  • Cash Refund Option. The Cash Refund Option ensures you “get your money’s worth” out of your investment. If you (and your joint annuitant, if applicable) die before the amount of your TSP balance used to purchase your annuity has been paid out, the remaining amount will be paid to your beneficiary, or beneficiaries, in a lump sum. You can add this feature if you purchase a single life or a joint life annuity, and with level or increasing payments.
  • Ten-Year Certain Option. This option ensures you get at least 10 year’s worth of value out of your investment. If you die before receiving annuity payments for a 10-year period, your monthly annuity payments will continue to your named beneficiary, or beneficiaries, until the 10-year period is met. If you live beyond the 10-year period, you will continue to receive payments, but no annuity payments will be made to your beneficiaries when you die. You can add the ten-year certain feature if you purchase a single life annuity with either level or increasing payments. You cannot choose this option if you purchase a joint life annuity.

These options are designed to reduce the risk of the annuitant. But it comes with a price: the monthly annuity payments are usually lower when you select either of these options compared to not selecting them.

Taxes on Your TSP Annuity

Taxes are a huge part of retirement planning. The type of TSP account you have will often dictate how your taxes work.

  • Traditional TSP Account: Annuity payments from a Traditional TSP plan is taxed the same way you would tax withdrawals from a Traditional IRA or Traditional 401k plan: the income is taxed as ordinary when it is withdrawn.
  • Roth TSP Account: Annuity payments from Roth TSP contributions are not taxed, because the contributions that were made to that account were made with money that had already been taxed. The annuity payments from Roth TSP earnings are not taxed if they are qualified earnings, which occur when two conditions have been met: 1) 5 years have passed since January 1 of the calendar year in which you made your first Roth contribution, and 2) You have reached age 59½, become permanently disabled, or have died.
  • Military Combat Zone Tax Exempt TSP Contributions: If you have tax-exempt money in the traditional balance of your uniformed services TSP account, and you choose to purchase an annuity, the annuity provider will calculate the amount of tax-exempt contributions that will be paid as part of the traditional portion of your annuity payment and will inform you of this amount. The tax-exempt portion of your payments will be spread out based on your life expectancy (and that of your joint annuitant, if applicable). (source)

Factors that Affect the Amount of Your TSP Annuity

There are many factors that affect how much money you will receive from your annuity purchase. Some of the more important factors include:

  • The amount of money you use to purchase the annuity. (How much of your TSP are you using to purchase the annuity?)
  • The type of annuity you select. (Single Life, Joint Life?)
  • Your age at the time of purchase (and the age of your joint annuitant if you choose that option).
  • The interest rate index when your annuity is purchased.
  • Additional features of the annuity.

The Thrift Savings Plan website offers a Retirement Income Calculator to help you understand how much money you might receive when you purchase an annuity.

Pros and Cons of TSP Life Annuities

Annuities aren’t perfect investments. Here are some basic pros and cons, depending on your situation.

Benefits of a Life Annuity:

  • Lifetime payments without the stress of dealing with the stock markets or the fear of running out of money.
  • Ability to create a budget based on the amount of money you expect to receive each month from your annuity.
  • Option to purchase a joint annuity which will make a monthly payment to your survivor in the event you die first.
  • Option to purchase inflation protection to offset future inflation and protect the purchasing power of your annuity payments.

Disadvantages of a Life Annuity:

  • Annuities are permanent. You can’t change your annuity once it has been purchased.
  • Purchasing power of life annuity will decrease over time if you choose a fixed monthly payment over a payment with inflation protection.
  • Participants are unable to make large lump sum withdrawals against the principal, which is something they can do with other retirement plans.
  • An annuity may not be necessary if the retiree has a military or government pension, in addition to Social Security or other income streams.

Considerations Before Buying a TSP Life Annuity

How you handle your retirement will likely be one of the largest financial decisions you will make. It is strongly recommended that you speak with a retirement specialist or financial planner before purchasing a life annuity. You will need to consider several factors including:

  • Your current and expected retirement income from pensions, Social Security, investments, businesses, employment, etc.
  • Your age, health, and life expectancy
  • Your need for immediate monthly cash flow, versus the ability to live off your current income.
  • Retirement goals
  • Your desire to leave money to your descendents
  • And more.

Keep in mind that once you buy a life annuity, it can’t be undone. It also doesn’t have to be an all or nothing proposition. You can purchase an annuity with a portion of the funds in your TSP; you don’t have to use 100% of the funds. So take your time with the decision. It may be the biggest financial decision you ever make.

Why Military Members Don’t Get Matching Contributions in the Thrift Savings Plan

The Thrift Savings Plan is a great investment opportunity for military service members and eligible civil service members working for the US government. The TSP offers the opportunity to save in a traditional or Roth retirement account, and while the TSP doesn’t offer too many investment options, it offers among the lowest cost investment funds you will find anywhere.

Thrift Savings Plan Matching ContributionsThe Thrift Savings Plan is virtually identical for military members and civil service members, but there are some differences you should be aware of. The first is that they are actually housed under different plans. You can have a military TSP account and a civil service TSP account, but they will be separate accounts. You can be eligible for both accounts if you worked for one agency and then another, or even if you work for both at the same time. A good example of this would be a civil service worker who also serves in the Guard or Reserves. You cannot combine these accounts if you are still eligible to contribute to both of them. You can only combine them after you are no longer eligible to contribute to one of them. (Even then, you may not wish to combine your military TSP account if you have contributions that were made in a tax free zone).

Another big difference is that civil service members have an automatic agency matching contribution added to their account. In fact, matching contributions are automatic for new employees. As a general rule of thumb, military members do not have matching contributions. Let’s take a look at agency matching contributions, then dive into why military members don’t get them.

Thrift Savings Plan Matching Contributions

This chart shows how Thrift Savings Plan matching contributions are made for civil service employees who fall under the Federal Employee Retirement System (FERS). Federal employees under the Civil Service Retirement System (CSRS) system are not eligible for agency contributions to their Thrift Savings Plan account.

TShrift Savings Plan Matching Contribution Chart

Civil Service members receive a matching TSP contribution.

As you can see from the chart above, civil service members get a 1% agency contribution regardless of whether or not they elect to defer any of their own pay. FERS Civil Service members will then receive a 1% match for the next 2% of their pay that they defer, for a total of 5% contribution (2% member deferral, 1% automatic agency contribution, and 2% match = 5%).

FERS Civil Service members receive 0.5% match for each of the next two percentage points of pay they defer, up to a total agency contribution of 5% (1% automatic contribution, plus up to 4% matching contribution).

Most Military Members Don’t Get Matching TSP Contributions

If you are in the military, you are probably wondering why you don’t get matching contributions. It’s not that military members can’t get them, it’s that you probably don’t. The secretary of each branch of the armed forces is authorized to allow matching contributions for servicemembers in critical specialties. These matching contributions are generally given as incentives to servicemembers who agree to serve 6 years on active duty in those specialties. According to Wikipedia, the last time this was available was the end of 2008 (for new recruits; so some military members may still be eligible for matching contributions).

How the matching contributions work. Matching contributions are only made to contributions from base pay, so any incentive pay, special duty pay, bonuses or other pay used to fund your Thrift Savings Plan won’t count toward your matching contributions. After that, the formula is similar to to the civil service formula, but with two notable differences: 1) there is no automatic contribution. You must make a contribution to be eligible to receive matching funds. 2) you are only eligible to receive 4% in matching contributions.

It works like this: Eligible servicemembers will receive a 100% match on their first 3% of contributions, and 50% match on the next 2% of their contributions, for a total of up to 4% matching contributions. This formula is similar to many civilian 401k plans.

Why Don’t All Military Members Get Matching Contributions?

I believe it is possible for the secretary responsible for each service to authorize matching TSP contributions for service members, however, these funds have to come out of personnel funds, which are limited each year by budgets mandated by Congress. In other words, they could do it, but they would have to cut funds elsewhere. The secretary of each service normally chooses not to so they can allocate those funds to other needs, such as paying military salaries, selective enlistment and reenlistment bonuses, retention pay, and more. Giving everyone a matching contribution would mean cutting force strength numbers, which would leave the services shorthanded.

How to Use This When Making Investment Decisions

You should look at all your options when trying to decide between investing in the TSP or another investment opportunity. In general, most military members should be eligible to participate in the Thrift Savings Plan and an IRA. Which is better? It depends on your situation. We covered this in more depth in the following article: comparing TSP and an IRA.

Bottom line: Don’t get caught up on whether or not you receive a matching contribution. It’s neither fair, no unfair. It just is. The important thing is to look at the opportunities available to you and take advantage of them. In my opinion, the Thrift Savings Plan rocks. It’s a great opportunity, with or without a matching contribution. Take advantage of it. You will happy with yourself 20 or 30 years from now when you see a 5 or 6 figure balance in your TSP account.

Sequestration Impact on Thrift Savings Plan Contributions

The Sequestration will affect virtually every government employee, including civil service employees, DoD civilians, and military members. While military pay will remain unaffected, many of their non-monetary benefits may be cut. Unfortunately, DoD civilians and other civil service employees may be subject to furloughs of up to 20% of their hours each pay period.

Sequestration impact on TSP contributionsAccording to AF.mil, “Civilians may be furloughed without pay for up to 22 discontinuous (or 30 continuous) days spread over a maximum number of pay periods possible with no more than 16 hours furloughed in pay period. The covered pay periods are from April to September 2013.”

This is a tough pill for many to swallow, as it makes financial planning difficult and will stretch many budgets. One aspect many people don’t think about after the initial shock wears off is how the sequestration will affect Thrift Savings Plan contributions. The good news is that none of the rules around the TSP are changing – the government isn’t taking away agency matching or preventing participants from making contributions. TSP Contribution limits remain unchanged. However, because agency matching is based on earnings, many TSP participants will see decreased retirement contributions this year. Let’s take a look at how the sequestration will impact Thrift Savings Plan Contributions.

Sequestration Impact on Military TSP Contributions

Based on recent information from TSP.gov, there should be no direct impact on TSP contributions for military members at this time, because military base pay in unaffected. Military members will still be able to make their normal contributions, including the contributions of special pay, bonus pay, and other allowable benefits.

Sequestration Impact on Civil Service TSP Contributions

Civil service members and DoD civilians will see the most changes with their TSP accounts. While there are no direct rule changes to how the TSP is administered, the impact of working fewer hours and receiving reduced pay will decrease the total agency contributions members see. Let’s take a look at how Agency contributions work, and how the sequestration will impact retirement contributions. Here is the TSP agency matching chart, courtesy of TSP.gov:

TSP Agency Contribution Chart

As you can see from the chart above, the government automatically contributes 1% of your base pay, regardless of whether you make any contributions. FERS Employees then receive a 100% match for the first 3% of their pay they contribute, then 0.5% for the next 2% of their contributions from their base pay. Nothing on the above chart is changing. However, because your pay is decreased, the total amount of your contributions will be decreased.

For example, Let’s say you earn $2,000 every two week pay period and you contribute a total of 10%, or $200, to your TSP. If you are furloughed for 2 days per pay period, your pay would be reduced to $1,600, and your total contributions would be $160 if you kept things as-is.

If you make TSP contributions based on a flat dollar amount, and not a percentage of pay, then your contributions will remain unchanged. Keep this in mind, as it may impact your budget since you will be contributing the same dollar amount, but receiving less pay.

Should You Reduce TSP Contributions?

Hopefully the sequestration will be short lived, but right now, it’s too early to tell. My recommendation is to sit down and run some numbers to see how this will impact your budget. If you can afford to keep things in the current state for a few pay periods, you may be able to weather the storm. If things are already tight, then you may need to cut your contributions.

Keep in mind that reducing your TSP contributions may impact your agency match. As mentioned earlier, the formula for agency matching contributions remains unchanged, so if you reduce your contributions, the agency matching contributions may be affected.

Should You Stop TSP Contributions

At this time, I wouldn’t recommend stopping your contributions unless absolutely necessary. Even keeping things at 1% of your pay will help you grow your retirement nest egg, and will still get you additional contributions from the federal government. However, you will need to let your budget be your guide.

TSP Loans

Taking a TSP loan is an option if necessary, but keep in mind there are several downsides of taking a TSP loan, including the need to immediately pay the loan back in full if you lose your job. If you believe you may be laid off, a TSP loan is one of the worst things you can do. My recommendation is to learn more about TSP loans before determining if this is an option for you.

TSP Financial Hardship Withdrawals

TSP hardship withdrawals are an option if you absolutely need access to your cash, but I recommend looking everywhere else for additional cash before going down this route. There are several reasons, but mostly because it will end up costing your more money in the long run. Here is how a TSP hardship withdrawal will affect your TSP plan:

  • Your withdrawal is limited to the amount of your hardship – in other words, you must document the hardship and how much money you will need. This is also limited to a one time withdrawal. Since the sequestration will last for an undetermined time frame, you should hold off as long as possible before making this decision.
  • You will pay an immediate 10% early withdrawal penalty and any income tax associated with the withdrawal, further reducing the amount that you withdraw.
  • You will not be able to make TSP contributions for 6 months following your hardship withdrawal.

Here is more information on the downsides of TSP hardship withdrawals.

Images courtesy of TSP.gov.

How to Manage Your Thrift Savings Plan Account

Managing your Thrift Savings Plan account seem like a simple task – after all, there are only a handful of funds within the TSP. So it should be fairly easy to set up your account, allocate your investments, and make sure things stay in balance with the rest of your investment portfolio, right?

How to manage your Thrift Savings Plan

TSP Management Tips

On the surface, this is true. But things can get more complicated when you add other investments to the mix. Let’s say, for example, you have a Traditional or Roth IRA. How would that affect your investment portfolio? What if you have left the government or military service and now have a civilian 401k plan or other retirement plan? What about taxable investments such as mutual funds, stocks, bonds, or other investments?

Now things are getting a little more complicated. But they don’t have to be. Let’s take a look at how to manage your Thrift Savings Plan account – starting from making contributions, to making sure you have your funds in the right place, to ensuring your TSP fits with the rest of your investments. We will also look at types of accounts, risk management, and software you can use to make the job easier.

1. Review Your Contributions

The Thrift Savings Plan allows participants to contribute up to $17,000 per year, or up to $22,500 for those age 50 and over. It’s a good idea to review your contributions each year to make sure you are on track for your retirement. You don’t necessarily have to contribute the maximum each year to make a big difference in your retirement planning. Here are a few tips to get the most bang for your buck:

Are you contributing enough to get the match? Civil servants and other non-military TSP participants get an automatic agency match on their contributions. Even if you don’t defer any of your compensation, you will earn 1% of your salary as an agency contribution. You can get a 1% match for the next 3% of your salary that you contribute, and you will receive a 0.5% match for each of the next 2% of your salary that you contribute – up to a total of 5% match. That means you can receive a total contribution of 10% of your salary f you are willing to contribute 5% on your own. That is free money! See the chart below for more details on how the TSP agency match works:

TSP aautomatic contribution chart

TSP Agency Match: You can receive a 10% contribution by only contributing 5% of your salary.

Are you contributing special pay and bonuses? Military members aren’t eligible for agency matching, but they are able to make additional contributions throughout the year if they receive special pay and bonuses. Military members can elect to contribute from 10 – 100% of their special pay and bonuses, including reenlistment bonuses hazard duty pay, and career incentive pay. Even adding half of your special pay and bonuses will make a large difference in the long run.

2. Roth or Traditional TSP?

The Roth TSP is a new option for Thrift Savings Plan participants. The Roth TSP gives participants another option for retirement. Here is a quick overview of the options: The Roth TSP allows participants to make contributions with funds that have already been taxed, the contributions grow until retirement age, and then can be withdrawn tax-free during retirement. The Traditional TSP works the opposite way: contributions are made on a tax-exempt basis and are taxed when withdrawn during retirement.

There is no one-size-fits-all approach to choosing between the Roth TSP and the regular TSP – each situation is unique. I recommend spending some time to look at your total investment portfolio, whether or not you already have a Traditional or Roth IRA, whether or not you will have a military retirement, and other factors before you make a decision.

3. Diversify Your Portfolio, Not Each Investment Account

Tips to manageThrift Savings Plan Account

Learn how to diversify your investment portfolio

Asset allocation is making sure your investment portfolio contains a balanced approach. That means an assortment of stocks, bonds, and other investments. The key to asset allocation is remembering that it applies to all your investments, not just individual accounts. In other words, once you create the best asset allocation for your needs, you apply it across everything you own. This means you don’t need to create perfectly balanced asset allocation in your Thrift Savings Plan, another in your IRA, another in your 401k, etc. All your investments work together. It may be better to put all of your TSP holdings into one or two funds if it makes it easier to balance your entire portfolio.

4. Be Careful with Target Date Funds

Target Date Funds are a one-size-fits-all investment plan. The fund is a balanced blend of stocks, bonds, and other investments that is automatically balanced for your retirement date. These funds are great – if you only have one investment account and all your investments are in that fund. If you have more than one investment account, however, you need to be careful when using target date funds. My recommendation is to only use these funds if all your investments are in similar funds, otherwise, it can easily throw off your asset allocation.

5. Roll it in, or roll it out.

The TSP is a great place to invest – there are a variety of low cost funds that cover most of the important segments of the market. But of you have left government service, you may no longer be able to contribute to your TSP. It may be a good idea to roll your TSP account into another retirement plan if you have a variety of other investment accounts, such as IRAs, 401ks, or other employer-sponsored retirement plans. On the flip side, you might also be able to roll other retirement plans into your TSP. The idea here is to make your life easier by reducing the number of accounts you need to manage, and reduce the amount of time and energy it takes to diversify and manage your investment portfolio.

6. Manage Risk

Is your asset allocation in line with your risk tolerance? To figure this out, you need to look at all the investments in your entire portfolio, including your TSP, and other investments. Decide upon your investing timeline (retirement date), goals, and how much risk you are willing to take. Then you need to make sure your investments are in line with your risk tolerance. Target date funds are often already balanced in this manner, but it is difficult to maintain an entire portfolio if you have investments in several accounts. Often, the best way to make sure your investment portfolio has an appropriate amount if risk is to use software, such as the tool mentioned next.

7. Use Investment Tools to Help You Manage All Your Investments

Technology is amazing, and there are quite a few investment tools out there to help you manage your investment portfolio by understanding exactly what you have, what your risks are, and more. One of my favorite tools is also a free tool – Personal Capital. Here is an overview of how it works, and how you can use it to manage your TSP, along with all your other investments.

Click to crash test your portfolio.Personal Capital Overview: Personal Capital is a free tool to help you manage your investments. It works like this: You open an account, link your investment accounts to it, and the tool analyzes your holdings based on the risk tolerance you give it. Based on your investments, this tool will help you balance your investment portfolio to ensure you are always at or near your desired asset allocation.

  • How does it work? Personal Capital analyzes your investments to make sure they meet your desired allocation. They can also help you visualize how much you are spending in management fees, and whether or not you can find similar investments elsewhere.
  • Is it safe? Personal Capital uses bank level security, so yes, it is safe. I also use it personally and recommend it to family and friends.
  • How do they make money if it is a free tool. You have the option of hiring one of their investment planners if you wish, or you can use this tool on your own. The investment planners have a fiduciary duty to you, which means they must make the best investment recommendation for your situation, not the investment recommendation that makes them a commission. You do not have to use one of their investment advisors, and you will not be bothered by them if you don’t wish to contact them.
  • How can I open a free account? Visit the Personal Capital website.

Overall, I think Personal Capital is a great tool that can help you visualize how your TSP account integrates with the rest of your investments. This will help you maximize all your investments and manage them all in one location.

Photo credits: TSP, s_falkow, Personal Capital.

The Roth Thrift Savings Plan Has Arrived

If you are currently participating in the Thrift Savings Plan, then you have probably heard that a good thing just got better. The long anticipated Roth option for the Thrift Savings Plan was launched this week after several years of changes and delays. Unfortunately, not all branches will receive access to the Roth TSP on the same date, so this article wil cover a quick overview of how the Roth Thrift Savings Plan works, why it’s a great deal, and an update for the launch dates for DoD civilians and each branch of the military.

Roth TSP – Best of Both Worlds

Roth Thrift Savings PlanI’ve gone on record several times as saying the Thrift Savings Plan is awesome for investors. There are a few downsides, but it’s almost all good for the average investor. The average investor won’t be able to find such a simple and easy to use investment plan, or one that offers lower management fees.

I’ve also mentioned that I love the Roth IRA and that everyone needs one. The primary reasons Roth IRAs are so valuable for investors is due to their long term tax benefits. You are able to contribute funds which have already been taxed at your current income level, then invest those funds and allow them to grow until you reach retirement age – then you can withdraw them tax free. Since most military members are in a relatively low tax rate, this is an incredible opportunity to pay a relatively low amount of taxes on your income, let compound for decades, and never pay taxes on it again.

The Roth TSP account offers the best of both worlds as it combines the benefits of a Roth IRA with the Thrift Savings Plan. You can contribute to any of the Thrift Savings Plan funds (which are best in class in terms of management fees), and enjoy the long term tax benefits of the Roth classification.

Roth or Traditional TSP?

There are pros and cons to each plan, depending on your tax bracket, long term investment plans, and other issues. A good place to start is with this primer which compares the traditional and Roth 401k, because the 401k plan and TSP have very similar rules. You can contribute to both the traditional and Roth TSP in the same year, as long as your combined contributions don’t exceed the TSP contribution limits.

Roth TSP Start Dates

The Roth TSP officially launched on May 7, 2012, but the first batch of participants won’t be able to contribute funds until June, while the remaining participants will not be able to contribute until October. DFAS officials decided upon doing a phased rollout for the Roth Thrift Savings Plan due to the complexity of the various civilian, active duty, and reserve pay systems, and to ensure they correctly classify each type of pay, including things such as incentive pay, bonus pay, special duty pay, etc.

According to DFAS officials, the Marine Corps will be the first group of servicemembers to receive access to the Roth TSP, starting in June. All DoD civilians are next in line, when they get access in July, 2012, and the Air Force, Army, and Navy service members will be able to contribute beginning in October 2012.

Other TSP Changes

Due to the addition of the Roth TSP option, the TSP officials created new forms for in-service and post-separation withdrawals. The new forms will be able to accomodate both the traditional and Roth TSP. TSP officials also consolidated the forms for use by both civilian and uniformed personnel (previously there were forms for each TSP plan). The old forms will not be accepted after June 1, 2012, so be sure to get a copy of the new form if you are planning on making any withdrawals in the near future.

Can I Contribute to the TSP When I Leave the Military?

The Thrift Savings Plan is one of the best tools military members have to prepare for retirement. Similar to a civilian 401k plan, the Thrift Savings Plan is an employer sponsored retirement plan which allows participants to save money for retirement directly from their paycheck. The added benefit is the money you contribute isn’t taxed in the year you make the contribution, and it can grow tax free until you reach retirement age and make withdrawals. Because of the many benefits provided by the Thrift Savings Plan, many military members want to continue using it when they leave the service. The good news is you get to take the money and tax benefits with you when you leave the military. But many service members want to know if they can continue making contributions to your military TSP plan after they leave the service. Unfortunately, it isn’t allowed.

You Can No Longer Contribute to the TSP When You Leave the Military

Thrift Savings Plan Contributions

Can You Still Contribute to The TSP?

Once you leave the military, you can no longer make contributions to your military TSP account. You may, however, be able to make contributions to a different Thrift Savings Plan account if you get hired by a government agency which offers it. My wife did this after she separated from the military and later worked as a civil servant. The caveat is that you have to open a new Thrift Savings Plan when you start your civil service job, which means you will have two Thrift Savings Plan accounts. The good news is that civil servants are automatically enrolled in the TSP.

If you work for the government and open a new TSP account, you will have the option of rolling your military TSP into your civil service TSP. This may be a good idea as far as simplifying your book keeping (few accounts is almost always better since it takes less work to manage them). However, you should be aware that doing so may take away one of the biggest benefits of the military TSP – tax exempt contributions.

If you made contributions while in a tax free zone, your contributions would be considered tax-exempt, and you will be able to withdraw those contributions tax free when you reach retirement age. This is a huge benefit many veterans and military members are not aware of. So if you have any tax-exempt contributions to your TSP, I don’t recommend rolling them into a civil service TSP, or other employer sponsored retirement account unless you are able to keep these contributions in a tax-exempt status (which isn’t likely). You may, however, be able to roll your TSP into an IRA and preserve the tax-exempt contributions (the tax-exempt portion goes into a Roth IRA, the other portion goes into a Traditional IRA; get professional help if needed – you want to get this right the first time!).

Other Retirement Plan Options

Just because you won’t be able to make further contributions to your TSP account doesn’t mean you should stop saving for retirement. In fact, it is almost always a good idea to save for retirement. Here are some places you can invest if you plan on saving more for retirement:

Civil Service TSP. The TSP for civil service workers is virtually the same as the plan for military members, however, most civil servants are eligible for employer matching, which is where the government will make contributions to your account for you. The government will give you a small contribution just for participating, then they will match your contributions up to a certain percentage. It is highly recommended to take advantage of this plan as the employer match is essentially free money, and part of your employer benefits.

401k plan or other employer sponsored retirement plan. There are several employer-sponsored retirement plans similar to the Thrift Savings Plan, including 401k plans, 401b plans, and several others. Like the civil service TSP, some companies offer employer matching contributions, which can turbo-charge your retirement savings.

Traditional or Roth IRA. One of the benefits of investing in IRAs is that they are open to anyone who has earned income – even if you are participating in an employer-sponsored retirement plan. It is possible to have multiple retirement accounts, as long as you don’t exceed the relevant contribution limits in any given year. You can also have IRA accounts with multiple IRA providers, again, as long as you don’t exceed IRA contribution limits. For ease of bookkeeping, however, it is much easier to maintain your accounts in as few places as possible.

Self-employed retirement accounts. If you have your own business, you may be able to open a self-employed retirement account, such as a Solo 401k, SEP IRA, Keough, or another self-employed retirement account. If you are self-employed, then I strongly recommend meeting with an accountant to help you determine which business structure and retirement plan option are best for your needs (sometimes your business structure will determine which type of self-employed retirement plan account you are eligible for).

Important note about contribution limits: Thrift Savings Plan contribution limits are the same as other employer sponsored retirement plans such as the civilian TSP, 401k plans, 401b, plans, etc. and the limits apply across all accounts. This is good to know if you make contributions to both the military TSP and another employer-sponsored retirement plan in the same year.

Keep Saving for Retirement

Even if you are receiving a military pension, it is a good idea to continue saving for retirement. People are living longer now than ever before, and the cost of living will only continue to rise due to inflation. You may also find that saving for retirement will give you tax breaks now, or in the future, and potentially give you a variety of ways to manage your investments, and ultimately your estate.

Should You Rollover Your TSP Account Into an IRA?

If you have left government or military service in recent years, then there is a good chance you still have a Thrift Savings Plan (TSP) account in your name. Personally, I’m a big fan of consolidating financial accounts to make financial planning and management easier to deal with. But the TSP is in it’s own category of financial accounts due to several factors that separate it from other investment options, namely some of the lowest expense ratios you will ever find. So keeping your assets in the TSP may not be a bad option. But sometimes it’s best to simplify things and roll your investments into fewer accounts.

Should you rollover your Thrift Savings Plan into an IRA?

The first thing you will need to do is determine if your assets are eligible for distribution. The TSP has certain criteria, so contact customer service through the ThriftLine if in doubt.

Deciding to rollover TSP assets into an IRA

Once you determine your funds are eligible for distribution, you need to decide what to do with those funds. We previously discussed options for the TSP when you leave the service in this article: what should you do with your TSP when you leave the military?

This article covers the main options, such as leaving your funds within your TSP account, rolling it into an IRA, roll your assets into a 401k plan at your new employer, withdraw your funds (watch out for early withdrawal penalties), and roll your funds into a qualified annuity.

The TSP has many similar features to a 401k plan, so this article may also be helpful: should you rollover a 401k into an IRA? Let’s look at the pros and cons of rolling over your Thrift Savings Plan funds into an IRA.

Pros and cons of doing an IRA rollover

The TSP has some of the lowest expense ratios in the investment industry and you will be hard pressed to find mutual funds with expense ratios that low. You almost certainly won’t be able to find them in a 401k plan, as most 401k plans have funds with relatively high expense ratios.

An IRA, on the other hand, gives you better control over your investment options, including the ability to invest in a wide variety of stocks, bonds, funds, and other investments that you can’t use with the Thrift Savings Plan or a 401k plan. You can also open an IRA at many locations, including banks, online discount brokers, mutual fund houses, etc.

Advantages of rolling your TSP into an IRA:

  • Full control of investments
  • More investment options
  • Ability to control fees
  • Portability

Advantages of leaving your funds in the TSP: There are two main advantages to leaving your funds in the TSP: the low expense ratios, and the possibility of tax free withdrawals if you made contributions with tax free funds. This last advantage could apply if you contributed to your TSP plan while you were in a tax free combat zone.

To see if you have any tax exempt money in your TSP, look at the bottom of you balance sheet: you will see “Tax Exempt Balance – $xxxx.xx.” You may wish to keep your TSP if you have a large amount of tax free contributions because those contributions would have been made without being taxed and that percentage of your withdrawals would also be tax free – which is virtually impossible to achieve in the civilian world!

Additional benefits to leaving your assets in the TSP. You won’t be charged any additional fees to leave your funds in the Thrift Savings Plan (plan expenses still apply), and it won’t affect any of your other investments, or ability to open other retirement accounts.

Rolling over a TSP Account into an IRA

If you decide to roll your Thrift Savings Plan assets into an IRA, then you have a few options to consider. The first thing you will need to do is open an IRA if you don’t already have one. Here is a list of what to look for when opening an IRA and some of the best brokerages to open an IRA to help you.

Which option is the best?

There is no right or wrong option. If you prefer a hands off approach with low fees, or if you have a large amount of tax free contributions, then you may wish to keep your funds in the Thrift Savings Plan. If, however, you have a hands on investing approach, or simply wish for more investment options, then rolling your TSP assets into an IRA may be a better option for you. Be sure to investigate your options thoroughly and make the best decision based on your investment needs and risk tolerance. Best of luck!

Understanding Tax Exempt Contributions and Withdrawals to the TSP

The Thrift Savings Plan is one of the best investment vehicles for military members because it is low cost, easy to use, and easy to understand. It is also one of the best ways for military members to invest while deployed. Why? Because of a feature that allows military members to contribute tax-exempt military income to the Thrift Savings Plan on a tax exempt basis.

Why does that matter? Let’s take a look at how the TSP works, then we can better understand why tax exempt contributions can be so valuable to military members.

TSP – Tax Deferred Contributions vs. Tax Exempt Contributions

The Thrift Savings Plan works in a similar manner to a  Traditional IRA. That is, you make contributions which are tax deferred – meaning you get a tax deduction in the year you make the contribution, your income in your TSP account grows without the drag of taxes until you reach retirement age, then your withdrawals are taxed when you make them.

The TSP allows you to make contributions with tax-exempt income, which is earned in a tax free zone. Since your income is not taxed, the contributions you make will not be taxed when you withdraw that income in retirement years. This gives you some of the same features of a Roth IRA. However, there is one major difference – only the contributions are tax free upon withdrawal, not the earnings. The funds are co-mingled within your account and there is no way to determine where the income growth came from. Still, this is a great opportunity for military members to get an additional tax break that will help them now, and in retirement.

Understanding Tax Exempt Contributions and Withdrawals to the TSP

Tax exempt and tax deferred contributions can be a little tricky to understand if you have irregular income while you are deployed. Here is a recent e-mail we received from a Soldier deployed to Afghanistan. Let’s take a look at his situation, and see how if we can get a better understanding of how the process works.

Hey, Ryan. If you can answer this one you’ll be the only person who can- and I’ve tried just about everyone. I have been deployed to Afghanistan since the beginning of October. I aggressively paid into my TSP over the last 4 months by allotting 50% of my base pay and incentive pay to the fund. Although roughly 70% of what I make every month is tax exempt, my TSP states that only a little over 1/2 of what I put in is tax exempt, the remainder being tax deferred. This makes no sense to me at all and no one can explain this seemingly arbitrary allocation. If 7 of every ten dollars that I make per month are tax-free, and I put 5 of those into TSP, why isn’t everything in my TSP tax-free? I contacted TSP and they said to talk to my Finance Office. Unfortunately, they didn’t have a firm answer either.

Respectfully Yours,
MAJ Eric H., USAR
Afghanistan

Thanks for contacting us, MAJ H., and thanks for your service! I’m not 100% certain regarding your situation, but I’ll add my two cents, and we’ll see if anyone else out there has a better answer than I can provide.

The times I deployed, I believe 100% of my pay was considered tax exempt, so 100% of my contributions at the time were classified as tax exempt. This is important because it makes the calculations easy – 100% tax exempt income = 100% tax exempt contributions. However, since your income is mixed, it may change how your contributions are classified.

My best guess (not a firm answer – only speculation) is that since 100% of your pay is not tax exempt, then the TSP is using a combination of all income earned to determine the split of tax exempt contributions and tax deferred contributions. In other words, you can’t choose which income you use to make the contributions, you have to make the contributions as a proportion of your earnings.

Making contributions from your bonus pay might change the numbers enough that it appears there isn’t a correlation between your earnings, contributions, and the tax exempt amount. For example, if your base pay is 70% tax exempt and your bonus is 100% tax exempt, but your contribute 50% of each, then the ratio of tax exempt contributions wouldn’t equal 50%, or 60%, or 70%. It would be somewhere in between those numbers, especially if the bonus pay is substantially lower than your base pay. Play around with the numbers on your LES and see if the tax exempt earnings and contributions add up using this theory.

Tax exempt Thrift Savings Plan withdrawals

The process works in a similar manner when you make withdrawals.

The TSP website states, “If your beneficiary participant account includes a tax-exempt balance, the TSP will make all withdrawals from your account on a pro rata basis from both the taxable and the tax-exempt balances.” (source)

You cannot choose how and when to withdraw the tax exempt income, it is paid out in proportion to your total holdings. For example, if you have $100,000 in your TSP and $10,000 of that is tax exempt, you would receive 90% of your withdrawal as taxable income, and the other 10% as tax exempt. Keep in mind this is a rough example, and will change based on unique situations.

Does anyone have anything to add to this?