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.