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The Thrift Savings Plan: What Is It and Why Do You Need It?

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What is Thrift Savings Plan (TSP)?

TSP is an account similar to a 401(k). Federal employees (including those in uniform) may participate in the TSP. Military members put pre-tax money into an account, and have the right to take the money out of the account at a certain point in the future. At present, the government does not match funds placed in a TSP account by military members. Given the financial constraints of our country today, this is unlikely to change.

I’m planning on getting a military retirement.  Why should I bother with TSP?

This is an excellent question. There exist many calculators and websites, as well as financial planners, who can help decide how much money you need in retirement. Your military pension will provide some of this money. You’ll probably need more than your military retirement provides. To get more, your choices are other savings you’ve accumulated, Social Security, or another job.

Suppose you are like many Americans and believe your Social Security benefit will be about seven dollars a month, and you’re not excited about being a greeter at Wal-Mart until you’re 95 years old. That leaves other savings you’ve accumulated as the best place to come up with the extra retirement money you’ll need. TSP is an excellent vehicle for this.

Okay, fine.  I’ll need more savings.  Why use TSP?  Why not just a normal bank account or a normal brokerage account?

Two reasons. The rate of return on a normal bank account is often lower than the rate of inflation. This means that you aren’t getting much return for your money, if any at all. The second reason is what makes TSP (in my estimation) such a good program. TSP is taken from your paycheck before taxes, automatically, and invested in funds. You do not pay taxes on money you put into your TSP account. This means you pay less in taxes each year than you would otherwise.

This is the government, however, and they’re not going to let you keep all the money forever. How TSP works is that you pay taxes on the income when you withdraw it from TSP. The idea here is that you will pay taxes on the money, but likely at a significantly lower rate. Your retirement income will probably be much less than your current income, and thus your tax bracket will be lower, and thus not only do you pay less tax now, you’ll pay less tax on your TSP savings later.

How do I get started?

Go to your finance office and enroll in TSP. They will ask what percentage of your pay you would like deposited in your account. You can contribute from your basic pay up to a certain percentage, as well as up to 100% of any incentive pay, special pay, or bonuses. The only thing you cannot contribute toward TSP is your BAH or BAS.

The IRS annually sets limits as to how much you can contribute to TSP in tax before dollars. In 2011, the amount is $16,500, but it can change from year to year. The TSP website will tell you how much you can contribute.

Can you explain that tax stuff again?

Certainly. Your TSP contributions are subtracted from your pay to give you your taxable income. Thus, if your base pay is $50,000 and you contribute $10,000 to TSP, your taxable income is $40,000.  This means you pay less in taxes.

When you take money out of your TSP account at some point in the future, it is taxable income in that year.

 Are there other tax benefits to TSP?

Possibly. Depending on your adjusted gross income for the tax year, you may also be able to take a retirement savings contribution credit on your tax return. IRS form 8880 discusses this in more detail.

 Can I put other assets into my TSP account?

Yes. If you have a traditional IRA, a simple IRA, or a 401(k) account, you may be able to transfer it into your TSP account under certain conditions. TSP can assist you with this transfer.

So, what does TSP do with my money?  They spend Social Security on other things, what’s to keep them from spending my savings on something else?

Your TSP money goes into an account with your name on it, and you get periodic statements tracking your savings. TSP has several funds in which they invest your money. There are two types of these funds. The first type is “life cycle funds,” that provide a mix of investment products (i.e. stocks, bonds, and securities) in a mix based on when you think you’ll want your money. For example, the L2045 fund is aimed at people who think they’ll want their TSP funds beginning in the years 2035 and 2044.

TSP also has what it calls “individual funds”. There are five of these, and these are structured like mutual funds that you could get at a civilian brokerage. Each fund tracks in some way a particular index or existing civilian mutual fund. The five funds are the government securities investment fund, fixed income index investment fund, common stock index investment fund, small capitalization stock index fund, and international stock index investment fund. The make-up of these funds is relatively self-explanatory.

Each of these funds has a different mix of securities and a different investment strategy. Before you choose the fund for your TSP contributions, make sure you know which fund you are getting and that you are comfortable with its strategy.

My shipmate told me I can get a loan from TSP. Is that true?

You can get a loan from TSP, provided you have contributed enough to TSP to have money to take out. You can’t borrow less than $1000, and the maximum amount can borrow is $50,000. There is a fee of $50 to process the loan, and you have to pay interest.

How do I get my money back from TSP once I retire?

There are two ways to do this. A partial withdrawal, and a full withdrawal. You would think these would be self-explanatory but this is the government, so it’s not so simple.

A partial withdrawal means you take some money from the account and leave the rest to take out later. You’ll only be able to take a partial withdrawal once, and it has to be more than $1000.

A full withdrawal means you take all your money out, but in your choice of ways. You may take the full amount as a single payment, a series of monthly payments, or a life annuity.

Life annuity brings up a good point.  What if I die before I get all my TSP money back?

Your TSP account becomes part of your estate. You can either designate someone as your TSP beneficiary, or it will be paid out according to law. (Shameless plug for the JAG folks:  if you don’t have a will, go to your JAG office and get one!)

I have more questions, or I’d like more information on some of the things we’ve talked about.  Where can I find it?

The TSP website at www.TSP.gov contains all the information you could ever want about this program, and then some. It also allows you to manage your account. In short, it is the clearinghouse for all information on the TSP.

Please bear in mind that I am neither a CPA nor a CFA. Exercise due diligence and make sure to make informed decisions before investing any of your money in any way. I personally think TSP is a very good idea, but it might not be for you. If you have questions about TSP or any financial topic, consult your finance office or a civilian expert.