Military TSP – How Service Members Can Make the Most of Their TSP Plan

Congress created the Thrift Savings Plan as part of the Federal Employees’ Retirement System Act of 1986. The Thrift Savings Plan offers the same tax and retirement savings benefits that individuals receive from their 401(k) plans through private corporations. It was available to federal civil service employees upon its creation. But, members of the uniformed forces,…
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Congress created the Thrift Savings Plan as part of the Federal Employees’ Retirement System Act of 1986. The Thrift Savings Plan offers the same tax and retirement savings benefits that individuals receive from their 401(k) plans through private corporations. It was available to federal civil service employees upon its creation. But, members of the uniformed forces, including those in the Ready Reserve, were not eligible to participate in the Military TSP until 2001.

The TSP is a defined contribution plan. This means that the retirement income you receive from your TSP account will depend on how much you deposit into your account during your working years and the earnings accumulated over that time.

The TSP plan can be used effectively by all different tax brackets in the military, but everyone needs to ensure that they are making the right contributions for their unique financial situation if they want to make the most out of their retirement account.

Why You Should Invest in the Thrift Savings Plan

You are responsible for your retirement. Before you think your military retirement pay will be enough to live on, you should understand that less than 20% of servicemembers serve long enough to draw military retirement pay.

What about Social Security Benefits? Yes, Social Security Benefits should help.

But think about this for a moment, because most people rarely do…

  • The Social Security Administration openly admits benefits are expected to be depleted by 2034. After that period the program is expected to pay out 75% of benefits.
  • Chances are you’re going to live longer than you think. According to a recent report from the American Academy of Actuaries, if you reach retirement age (59 1/2) you have a good chance of living to the age of 80.
  • Are you factoring in medical costs during your retirement? Fidelity benefits consulting released a retiree health care cost estimate revealing the average 65-year-old couple will spend approximately $245,000 on medical expenses during retirement.

Social Security is underfunded. You may live longer than you expect. And medical expenses are likely going to cost you a small fortune. How can we prepare for these lifetime expenses?

Start Investing in the Thrift Savings Plan Now

Most people have heard at some point or another they should start investing early. This can seem counter-intuitive because there’s a very good chance you don’t make that much money between the ages of 18-25. But we’d like to show you the math behind starting early, perhaps this can help shed light on this investment principle.

If you start investing early in your lifetime, the effects of compounding can be tremendous. Let us give you an example…

Let’s say you start setting aside $1,000 a year at age 25, or approximately $19 a week. This can easily equate to dinner for two at Chipotle or an IMAX movie ticket. You put it in a retirement account earning 8% a year. If you stopped investing completely when you turn 35 – that is, you’ve invested for only 10 years and didn’t add another penny – your total investment will have grown to nearly $169,000 by the time you turn 65 and are ready to retire. That’s right – a $10,000 investment turns into $169,000.

OK, here’s where it gets really interesting.

Let’s say you do the same exact thing, but instead of starting at 25, you don’t invest the $1,000 a year until you turn 35. And you keep on investing that much every single year until you turn 65. That is, you invest $1,000 a year for 30 years, rather than for 10 years as in the previous example. How much do you wind up with when you’re 65?

Only about $125,000. That’s right: Even though you invested $30,000—three times as much money—you wind up with less. This is the power of compounding when you start investing at such a young age.

Are You Making the Most of Your TSP Account?

Federal employees who participate in the TSP have an advantage over many military servicemembers. They are automatically eligible for agency matching contributions of up to 5% of their pay. Military members aren’t usually eligible for matching contributions.

However, this will change with the Blended Retirement System (BRS), which uses matching contributions as a large component of the plan. Members who participate in the BRS will be eligible for the same match as their civilian counterparts. But, they will receive a reduced pension in return for the agency matching contributions. The Blended Retirement System officially launches on January 1, 2018. So keep your eyes open and see if switching to the BRS is right for you (if you are eligible to change plans).

By looking at all of your options and investing according to your personal financial situation, you’ll be able to make the most of your TSP account and help set yourself up for a comfortable retirement.

Know TSP Plan Investing Preferences

TSP plans have a limited number of investment options. So, make sure you’re comfortable with not being able to invest in individual stocks or other publicly traded investments. Note: even though there are a limited number of funds, the TSP still allows investors to have a sufficiently diversified investment portfolio, due to the large number of stocks and bonds found within each of the TSP funds.

The TSP’s 5 main fund options are all based on index funds. There is also a Lifecycle or “L” fund. These are comprised of the 5 main funds and allocated according to your target retirement date. If you’re an investor who likes to have the option to put your money elsewhere, TSP may not be right for you.

While there are not many options to choose from, these options cover most types of major indexes and have very low fees. Low administrative expenses and resulting fees are one of the TSP plan’s most attractive features since fees eat away at your returns. Since the TSP has very low administrative expenses, more money will stay in your account and continue working for you.

Save a Percentage, Instead of a Dollar Amount

People with low salaries sometimes feel like they can’t contribute to their TSP in a way that makes any difference. Every bit saved helps, though. If you feel daunted by your TSP plan, consider contributing the same percentage of your check per pay period, instead of a specific dollar amount. This way, if your compensation increases, the amount you contribute will rise at the same rate as well.

The percentage strategy works especially well for service members. If you receive incentive pay, special pay, or bonus pay, your contributions will adjust accordingly even if your paycheck isn’t the same each month.

Maximize Your Contributions When Possible

The IRS sets new maximum contributions, known as the IRS elective deferral limit, each year.  You can view the Thrift Savings Plan contribution limits online. You can also consult the Office of Personnel Management to see if the limits have changed and whether you qualify for any age-based contributions. These can put you at a higher annual limit.

For 2017, the IRS elective deferral limit is $18,000 in regular contributions and $6,000 in catch-up contributions. For uniformed services participants, this includes incentive pay and special pay, including bonus pay.

If you want to maximize your contributions, but aren’t sure how much you should deposit per pay period, use the “How much can I contribute?” calculator on the Thrift Savings Plan website. This tool will help you determine the specific dollar amount you should deduct from each pay period in order to maximize your contributions for the year.

Make TSP Plan Contributions While on Deployment

One of your best investment options as a deployed military member is to make TSP contributions while on deployment. It’s best to contribute to the Roth TSP while deployed because you will be making contributions to a Roth account that have never been taxed. And the earnings and your withdrawals won’t be taxed at retirement age. This is a huge win.

One of the benefits of participating in the TSP while deployed is the ability to exceed the $18,000 annual contribution limit. If you max out your Roth TSP, your additional contributions will go into the Traditional TSP account. But there is an additional benefit. These contributions will be classified as tax-exempt contributions. This means only earnings on contributions, not the contributions themselves, will be taxed when withdrawn at retirement age. Make the most of your TSP plan by contributing as much as possible while deployed.

Consider the Roth Option

Are you using the right TSP plan? Have you ever considered switching to the Roth option? The Roth TSP option was put into place on May 7, 2012. This plan allows TSP participants to contribute money to their plan after payroll taxes have been paid, instead of before taxes, like traditional contributions, are made before taxes.

The Roth TSP option is a fantastic option for young service members. Since they are already in a lower tax bracket, the Roth TSP is ideal. It gives them longer tax-free growth and more tax diversification.

Look at your own tax situation to see if the Roth TSP plan makes sense for your retirement goals. For example, if your tax rate is higher now than you believe it will be during retirement, the Roth option may not be right for you. However, you will want to choose the Roth option if you believe that you will be at a higher tax rate during retirement.

Use your MWR to find a tax specialist who can help you make the determination if the Roth option is right for you.

Monitor Your Investments

As with a lot of things in life, the more time, money, and effort you put into your TSP plan, the more you will get out of it. If you want to make the most of your TSP account, you can’t just let it sit there. Just because the investment options are limited with a TSP doesn’t mean that you don’t have to monitor your account at all.

If you are a beginning investor, use the Thrift Savings Plan’s quarterly and annual statements to stay on top of your investments. You can also find the most current information on the Thrift Savings Plan website. As a TSP plan participant, you can also make transactions and access your individual account information online by using your TSP user ID or account number.

Another great tool to stay on top of your accounts is The ThriftLine, TSP’s automated telephone service. Use this toll-free number (1-877-968-3778) to access current share price, TSP news, and loan and annuity rates or even to speak with a TSP Participant Service Representative.

We also have a guide for managing your Thrift Savings Plan account, along with the rest of your investment portfolio. It’s important not to look at the TSP alone, but to consider the role it plays in your overall financial plan.

Use these tools available to you to keep tabs on your investments. They’ll help you know whether or not you’re making the most of your TSP account.

Making the Most of Your TSP Plan

By knowing your investing preferences and understanding which account will work best for you, you’ll have a healthier retirement savings account. Assess how much you can contribute each year and stay on top of your investments. Take an active role in your investments to make sure that you’re making your money work hard for you. And remember, if you ever feel confused about your options, seek help from a tax professional available to you through MWR services.

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About Kristi Muse

Kristi Muse is a military reservist spouse and freelance writer. She loves writing about strategies to save military families money, get out of debt, and live a frugal life. Kristi shares her own experiences about debt and parenthood on her blog Moderate Muse.

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  1. bruce d silliman says

    My grandson has been in the Army only since last August and has a 3 year, 9 month enlistment. If he starts soon to invest the maximum annual amount into the Roth TSP he would have approximately 3 years of contributions which would be tax-free upon withdrawal. If he does not reenlist is it possible for him to keep his money in the TSP program where it would take advantage of any fund price increases until when he is eligible to make withdrawals (i think that is 59 1/2 is it not) or would he have to transfer his contributions into a different 401k Roth account? I do want to say that this guide is excellently and clearly written to provide the maximum information for him to make his decision. Thank you.

    • Ryan Guina says

      Bruce, your grandson will be able to leave his funds in the TSP for as long as he wishes. There are no additional costs or penalties for leaving the funds in the TSP.

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