Disadvantages to Investing in the Thrift Savings Plan

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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…

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.

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About Ryan Guina

Ryan Guina is the founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Joey says

    The TSP is EVIL! Do no put a single cent in it (unless they are providing matching contributions).

    The TSP holds your money hostage AND makes you pay them to do so. Imagine your employer has a bank that you use…you put money in and pay them a fee to manage (TSP fees are low – great!). However, as long as you still work for that employer you cannot take any money out of their bank. Not even just the money you put in, even if you have $0 in matching contributions. That is how the TSP works (at least for the uniformed services). You cannot roll your TSP to an IRA and you are not permitted to withdraw the Roth contributions you have made. The law allows both as do most employers 401Ks and any legit financial institution. The only options TSP provides for you to access your money is either a loan or an extreme hardship withdrawal.

    So, as long as they employ you, they get to hold your money hostage. Why are their rules so much more restrictive than the law and common-practice for the rest of the country? How are their practices even legal?

    Aside from matching contributions, you are better off putting your money anywhere else (including under the mattress). Their rates do not justify their restrictions.

    • Ryan Guina says

      Joey, What works for one investor may not work for another. Telling everyone to stay away does them a disservice and is irresponsible. People should only save for retirement with money they will not need in the near future. That is the difference between retirement investing and short or medium term savings.

      Taking in-service distributions is allowable under law, but there are many nuances, and not all employer plans allow this (I have worked for several civilian employers, none of which allowed this; from my understanding, in-service distributions is more the exception than the rule). It’s also advisable that people seek out the advice of a tax professional to ensure they don’t make a costly mistake.

      I recommend people who are considering retirement plan distributions read the
      (IRS 401(k) Resource Guide – Plan Participants – General Distribution Rules) for more specific information.

      If the TSP is not for you, then consider investing in an IRA (which also has early withdrawal penalties), or in a non-retirement investment account, also called a taxable investment account. Using a taxable investment account will give you access to your money at will. However, it’s also important to do more research to better understand the tax implications of buying and selling securities (I recommend learning more about short term and long term capital gains, for instance, and the wash sale rule, if you are more inclined to look for additional tax benefits when selling securities for a loss).

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