Benefits of Investing in the Thrift Savings Plan

The Thrift Savings Plan (TSP) is a US Government sponsored retirement plan that is very similar to a traditional 401k. It is primarily open to US Military members and eligible civil-service employees. Why does it rock?

It is simple to do. Electronic sign-up takes less than 5 minutes and will start within a month. Once you set it up, you don’t have to do anything – it’s automatic!

It’s easy to invest with the TSP. 5 simple index funds and 5 LifeCycle Funds (targeted retirement date funds) make it easy for anyone to invest, even if you don’t know much about investing. The index funds are broken into 2 groups – stocks and bonds. A third group is a life-cycle fund, which is comprised of both stocks and bonds.

  • Stocks. The stocks include indexes for Large Cap (S&P 500), Small Cap (Dow Jones Wilshire 4500), and International Stocks (Morgan Stanley International EAFE Stock Index).
  • Bonds. The bonds include Govt. (Treasury Bonds) and Fixed Security Bonds (Lehman Bros. US Aggregate Index).
  • Mixture. The LifeCycle Funds automatically allocate a portion of your portfolio to target risk and returns based on your proposed retirement date. These funds cover all the fundamental segments of the marketplace.

Very low overhead. The highest you can currently expect to pay in fees is .05%, including the LifeCycle Funds. This is extremely low as far as fees go!

Tax free withdrawals are possible. (Yes, it’s true!) TSP contributions are made with pre-tax dollars and reduce your current taxable income. You pay taxes only when you make withdrawals in retirement. If you contributed to your TSP while in a Tax Free Zone, you were not subject to any federal taxes on those earnings. Therefore, when you withdraw those monies they are tax exempt! You don’t get to pick and choose when to make tax free withdrawals, they will be allocated in proportion to your total amount. 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.”





Invest bonuses. You can easily add a percentage (or all) of your special duty, Hostile Fire Pay, Hazardous Duty Pay, and other bonuses. If you have some extra income, why not direct a portion to your retirement funds?

Matching contributions for civil-service employees (up to 5%) . Sorry, still no current match for military. The Army has debated doing it in limited cases as a retention tool. Will the military get matching contributions? Not likely, as the funds would come from personnel funds, which are limited. If you are in the military and would like to see that change, you should write to your Congressman.

Overall, I believe this is a very simple and cost efficient method for investing. This is a great system for many civil-service and military members to supplement their retirement income.




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Date published: March 25, 2008. Last updated: April 28, 2009.

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Ryan Guina is the founder and editor of this site. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is currently serving in the IL Air National Guard. He also writes about money management, small business, and career topics at Cash Money Life. You can also see his profile on Google.

Comments

  1. If I select the REDUX retirement plan offered at 15 years, can I invest the entire $30,000 tax exempt into the TSP? TSP offers an annual contribution cap of $49,000. Currently, the IRS allows a max of $16,500. I invest 6% annually which amounts to nearly $2300. I still have another 2 years to think about it though. Any help would be appreciated.

    • Hi Jon, Here is the answer according to DFAS:

      Under current guidelines, the $30,000 may be used to contribute, in an amount not to exceed $15,500 for the annual deferred contribution, and up to $45,000 for the annual tax exempt contribution, to the Thrift Savings Plan (TSP) for the military. Of course, the Soldier must be a member of TSP and contributing from basic pay at the time of payment, and have designated a contribution percentage for any bonus payment, in order to contribute the desired portion of the Career Status Bonus to TSP. The Soldier should make sure that the bonus percentage is established in the M0 entry on the pay account BEFORE the date the Career Status Bonus is paid. ~ http://www.dfas.mil/army2/bonuses/redux.html

      So the answer appears to be yes. However, since you are two years out, it would be worth looking into a little closer to execution time to be sure the rules are still the same. I would also recommend meeting with a financial planner who understands this system before making the decision (tips on How to Interview a Financial Planner). You may be better off taking the money and investing it, or you may be better off foregoing it and taking the higher retirement pay.

      Best of luck and thanks for your service!

  2. Ryan,

    Holy cow man! Great freakin’ blog! You hit it right on head with the benefits of the TSP. With the tax exempt zones (as when you are forward deployed in a combat zone), you can top out at $49,000….and that is PER YEAR! So think about it, if you are able to do it (that is put $49k away per eligible year…. and I completely understand that this is a ton of money to put away, which not many people can do), and you “straddle” two years on your deployment (say from November to May), then you can throw in $49k on each of those years! That is almost $100k over two years, which would set you up for the rest of your life, no matter what age you are. But obviously, the younger the better, giving time for compound interest to set in. I can’t wait to browse the rest of your blog for other great stuff. Keep it up my man!

    • Absolutely, Dr. Lawler, but keep in mind that not everyone earns $49,000 in a year, so even if they contributed 100% of earnings and bonus pay, they still may fall short of that goal. But there are some instances where military members receive large bonuses while deployed, which can be contributed to the TSP. Examples would be reenlistment bonuses, retention bonuses, and even annual bonus payments from previous signing bonuses and similar awards. Many pilots who re-up for multiple years try to do so while in a tax free zone so each subsequent payment is tax exempt, regardless of where they receive that payment in the future.

      Here is the best part of making these TSP contributions while deployed: the contributions will be classified as tax exempt contributions, which means the contributions themselves won’t be taxed when withdrawn at retirement age (though earnings on those contributions will be taxed). We recently covered this topic here: Understanding Tax Exempt TSP Contributions and Withdrawals.

      And we covered additional investing topics for deployed military members here: Best Investment Options for Deployed Military Members.

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