If you’ve read my article about the advantages of investing in the TSP, then you know that I believe the TSP is a great way for many military members and government employees to invest for retirement. However, there are also several drawbacks to investing in the TSP.
Disadvantages to Investing in the TSP
I will throw a caveat out there before I list some perceived disadvantages with the Thrift Savings Plan – the TSP is still a great investment vehicle for the majority of federal employees and military members who are eligible to participate in the TSP, especially with the new Roth TSP option, which recently became available to TSP participants.
Limited investment choices. There are only 5 investment choices (not counting Life Cycle Funds), which is a benefit and a drawback. The simplicity that makes investing in the TSP can also be a detriment to those who have a better understanding of investing or would like to further diversify beyond a few index funds. With the TSP you can not invest in REITs, or individual sectors such as technology, precious metals, healthcare, emerging markets, etc.
Limited tracking in money software. The second drawback is the inability to link to home finance programs such as Quicken, or MS Money. You can manually input your data into these programs, but there is no automatic download feature. So you must manually change it every time you invest, rebalance your portfolio, etc. That can be a pain, but it’s necessary if you want to have a clear picture of your net worth, asset allocation, performance, etc. (The TSP states the reason they do not offer this feature is to maintain low costs.)
No matching funds for military. Unless you are civil service, you do not get matching funds. In that case, it is usually better to max out your Roth IRA before contributing to the TSP. (This has changed to a limited degree since the initial publication of this article; military branches have the option of offering matching funds to service members, but only do so on a limited basis – usually only as a retention bonus. All matching funds come out of personnel budgets, which limits the service branches ability to do this on a full scale basis).
Difficult to track gains. The TSP site does not track cost basis. This is important to know for tracking purposes and monitoring your investments. You can do this manually, but if you did not do this from the time you began investing in the TSP, you will never get a truly accurate picture. A work around for this would be to use your current value as a cost basis, then track from now on. This will not give you a true cost basis from inception, but it will allow you to track annual growth. (But the TSP has well known index funds so they should be easy to track manually).
Inability to contribute after government service ends. Finally, once your service with the government is through, you can no longer contribute to the plan. However, this is just like any other 401k plan. You do have the option to leave your funds within the TSP, you can roll them into a different 401k plan, or roll them into a traditional IRA. Here are some more options.
The TSP is still a great investment option!
This article is not meant to dissuade you from contributing to the TSP, or look for other alternatives. This is simply meant to point out a few areas that more advanced investors may feel are limitations.
All in all, I still think the TSP is a good way to go for government employees looking for an easy to use and inexpensive retirement system. The pros far outweigh any cons, and regularly contributing to your TSP can be a great way to prepare for your retirement.
Comments
Good points here. In some cases, especially younger military members, a Roth IRA is a better choice than the TSP even though the TSP has extremely low costs for its funds.
Kirk, great comment.
The Roth is great for younger military members because it gives them longer tax free growth and more tax diversification. Since they are already in a low tax bracket, the TSP won’t lower it.
In my opinion though, anyone just starting out can’t go wrong with either the TSP or a Roth IRA. The point is to get started. I also think the TSP is a great place to begin because there aren’t too many investment options, which can be overwhelming to new investors.
Well put:
“No matching funds for military. Unless you are civil service, you do not get matching funds. In that case, it is usually better to max out your Roth IRA before contributing to the TSP.”
There is some talk about altering the 20 yr pension for matching contributions. This is a poor way to implement the change. The government should keep the system the way it is and let the “market timers” make up the difference in annual returns
I wish they would let us put a spouse match in…since our spouses have to follow us around, it’s a headache to have them have to rollover their 401(k) money everytime we PCS. It would be nice if I could auto-deduct money from my paycheck and put it in my spouse’s 401(k) (or TSP, whatever), and we could also port it when we PCS. I don’t even know where to start with this idea, though.
Brooke, I agree that it is a pain to transfer or rollover 401(k) plans with every PCS, but that is a much better option than cashing it out! The penalties are ferocious! However, It’s just not possible to combine a spouse’s money with the TSP though because, like an IRA or 401(k), they are only designed for the individual.
Then think about what would happen in the case of a divorce (I’m not implying anything for your situation, but that is the reality of many marriages nowadays)… How would the money be split? What if there was an agreement that one spouse would make all the retirement contributions from his/her check while the couple lived on the other check? It would work great until there was a need to split the money later.
I think it would just get to complicated.
While TSP data still can’t be imported into Quicken, balances, gains, and losses can be tracked online on Mint.com.
Thanks for the info, Christina.
Ryan,
We actually CAN contribute to our TSP after leaving the military. I recently learn how to do so myself, so I’m not bragging, just providing additional info.
To do so, the money must be considered an “eligible rollover distribution” for Federal income tax purposes. In other words, if we contribute to a traditional IRA during a year, file taxes, and wait to the money to clear as being eligible for rollover, we can sink this money into our TSP.
This info can be found in the “Summary of the Thrift Savings Plan” August 2010 newsletter, pg 7.
Why would we do so? Well, I’d gladly pay only .028% on $16,500 for the next twenty years as opposed to 0.82% for even the least expensive mutual funds.
Romeo
Romeo, thanks for the information. You are correct, you can make rollover contributions to your TSP under some circumstances. (the site is unclear whether or not you still have to be an active participant in the TSP in order to make rollover contributions).
I probably wasn’t clear in the article, but I was referring to making new contributions. For example, I still have my TSP, but I cannot make contributions to the account with money earned elsewhere. Thanks for the comment!
Ryan,
No problem. Like I said, I just learned it myself. It’s good to know about this loophole, especially for people who leave the service but still want to take advantage of the extremely low costs in the TSP funds.
Ryan,
I’m 60 yrs old and just retired from federal service. I currently have some money saved on my TSP and is currently on “G” Fund. I would still like to have the money earn without envolving too much risk. What’s the best thing for me to do with the money: Leave it there or roll it over to an IRA. If it is the IRA, which one, Roth or traditional.
Hi Pete, The G fund is government bonds, which have the lowest risk and lowest fees out of the various Thrift Savings Plan funds. If you are happy with that in your portfolio, then there is no reason to move your funds from the TSP to an IRA or other retirement account. However, you may find that your portfolio won’t grow much at all, so you may decide to move some of the funds into something that has slightly more risk, but also a greater chance to grow more than your G Fund.
Please keep in mind that it is impossible to give perfect advice based on the amount of information you have provided. Since you have just retired, this would be a great time to visit with a financial planner to go over your portfolio and investments to give you an idea of how long your investments will last and if there is a more optimal way to invest your funds. I recommend visiting with a fee only financial planner, as they have less incentive to “sell” you funds that earn them a commission. You can read more about finding a financial advisor, and interviewing a financial planner.
Regarding rolling your funds over into an IRA, this will depend upon your investment goals. If you want more control over your investments, then an IRA is the way to go. If you want the lowest risk and lowest fees, then the G Fund is about as stable and low cost as you can get. The question regarding a Roth or Traditional IRA is best determined first by deciding if you should roll your TSP into an IRA, then looking at your total financial portfolio to determine how most of your investments are taxed, when you will need the money, and other factors. This is an advanced topic, and one you should take to a professional financial advisor if you decide to roll your TSP into an IRA.
One brief comment regarding G Funds: by focusing primarily on low cost/low risk you may be overlooking the fact that you could still be losing money due to inflation. It may not feel like you are losing money but if your G Fund is yielding say 1.74% and inflation is 2.50%, you are not doing as well as you think in real return. Hope this helps you as you consider leaving money in G funds while in a low interest rate environment.