Four Awesome Things About the Thrift Savings Plan (TSP)
The Awesomeness of the TSP
The Thrift Savings Plan (TSP) is a defined-contribution savings plan. English please. In plain language that means it’s a plan that both you and your employer can contribute to. How much you accumulate in your TSP will depend solely on how much you (and/or your agency) contribute and how those contributions grow. Currently, the government does not contribute or match servicemembers’ contributions. However, that will change when the Blended Rate System rolls out in 2018.
The TSP is a savings plan for federal employees (both civilian and military). It’s very similar to the private sector’s 401(k) or the non-profit sector’s 403(b) plans. However, the TSP has some really awesome features that make it stand out against other retirement plans. Keep in mind, the TSP is not the military retirement pension. It is also not an Individual Retirement Account (IRA) either.
#1 Limited TSP Investment Options
One of the greatest attributes of the TSP is its limited choices of investment options. The TSP only has six investment options. You might be thinking, why is that a good thing? I like choices. Choices are great, but having too many investment options would overwhelm a lot of TSP investors, myself included. For example, my 403(b) plan through my current employer has 43 funds to choose from. For the TSP, you can pick from the six options below.
G Fund: buys nonmarketable U.S. Treasury securities. The U.S. Government guarantees the G Fund, so it won’t lose money, but the potential for earning is low –basically its trying to keep up and beat inflation.
F Fund: Bonds. Investment objective to match the performance of a Bond Index
C Fund: Common Stocks. Investment objective to match the performance of the S&P 500 (large to medium sized U.S. companies
S Fund: Small Cap Stocks. Investment objective to match the performance of the DJ U.S. Completion Total Stock Market (small-medium U.S. companies (non S&P 500 stocks)
I Fund: International stocks. Investment objective to match the performance of the MSCI EAFE (Europe, Australasia, and Far East) Index.
L Funds: Lifecycle Funds. Professionally managed investment funds that are tailored to meet investment objectives for a specific time horizon or when you think you will retire and need your money.
If you don’t feel comfortable choosing a combination of the G,F,C,S, and I funds, you can always choose a L Fund that will choose the allocation of funds for you.
#2 Traditional & Roth Options
Since 2012, servicemembers have had the option to contribute to either or both a Traditional or ROTH TSP. Choosing a Traditional or ROTH contribution is a personal financial strategy and is not a one size fits all answer. However, in a nutshell: Pre-tax dollars fund a Traditional TSP and the contribution and its earnings grow tax deferred. This means that a Traditional contribution helps to lower your pretax income but your funds will be taxed when you begin to withdraw them. Conversely, the ROTH TSP is funded with money that is already taxed. When you make qualified withdrawals in retirement, your funds are not taxed. Although more and more employers are moving towards adding a ROTH option to their plans, you already have that options under the TSP.
#3 Annual Limits & CZTE Contributions
The IRS determines the annual contribution limits for the TSP each year. Sometimes they stay the same, sometimes they change. For 2018, the elective deferral limit is $18,500, up $500 from 2017! If you are age 50 or older, you can contribute an extra $6,000 as a catch-up contributions.
Servicemembers that are serving in a Combat Zone with a Combat Zone Tax Exclusion (CZTE) also have the additional benefit of contributing up to $55,000 in 2018. Of the $55,000, up to $18,500 can be a ROTH contribution, while the remaining $36,500 must come from a traditional contribution. Timing is important on this one, but this Paycheck Chronicles article does a nice job of clarifying the issues.
#4 Super Low Expense Ratio
The TSP has a legendary super low expense ratios as compared to other retirement savings plans or investment brokers. In 2016, the TSP’s expense ratio was .038%. Think of it as having an average net expense of 38 cents per $1,000 invested. Now, think about if your expense ratio was .1% instead of .038%. Now you’re paying a dollar per $1,000 invested. Doesn’t seem like much on $1,000, but when you start accumulating hundreds of thousands of dollars over 20-40 years, it really starts to add up.
With all the awesome benefits of contributing to a TSP, would it surprise you to know that many servicemembers are not contributing at all to the TSP? It literally breaks my financial heart to know this. Maybe they think they can’t afford to contribute. Or, maybe they are counting on their retirement pension. Sometimes it’s hard to think about retirement when you are young or you are skeptical of the market. Or, maybe they’re counting on winning the lottery. Who knows why people don’t contribute to their TSP but, now you know that you are financially missing out if you don’t contribute.