Four Awesome Things About the Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP): Four Reasons Why It’s Awesome
The Thrift Savings Plan (TSP) is a defined-contribution savings plan. A defined what?. In plain English, 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.
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 or view your options compared in a tidy matrix.
G Fund: Nonmarketable U.S. Treasury securities. These assets are managed internally by the Federal Retirement Thrift Investment Board. The U.S. Government guarantees the G Fund, so it won’t lose money, but the potential for earning is low –basically, it’s trying to keep up with and beat inflation.
F Fund: Bonds. The investment objective is to match the performance of a Bond Index
C Fund: Common Stocks. The investment objective is to match the performance of the S&P 500 (large to medium-sized U.S. companies
S Fund: Small Cap Stocks. The investment objective is to match the performance of the Dow Jones US 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 Fund: 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. There are a total of five different Lifecycle Funds that target retirement dates through 2050.
#2 Traditional & Roth Options
Since 2012, TSP participants have had the option to contribute to either or both a Traditional or ROTH TSP. However, remember that when the government makes an automatic or matching contribution, it can only be made into a traditional TSP account. So, even if you only choose to contribute to the ROTH TSP, if you are receiving any government contributions, they are going to the Traditional TSP. Choosing between the Traditional or ROTH TSP is a personal financial strategy and is not a one size fits all answer.
With a Traditional TSP, you make pre-tax contributions. The contributions and their earnings grow tax-deferred, meaning you pay tax on them at the time of withdrawal. Traditional contributions help to lower your pretax income but your funds will be taxed when you begin to withdraw them in retirement.
Conversely, the ROTH TSP is funded with income that has already been taxed (in most cases, see #3 below). When you make qualified withdrawals in retirement, your contributions and earnings 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, lucky you.
#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 2019, the elective deferral limit is $19,000, up $500 from 2018! If you are age 50 or older, you can contribute an extra $6,000 as catch-up contributions.
I’ll save you the hassle of pulling out your Ti-83. In 2019, that’s $1,583.33 every month or $791.66 every paycheck to max out your standard $19,000 elective deferral limit. Stay with me. I know those are some big numbers I’m throwing around. For most, maxing out the TSP is a long-distance marathon, not a sprint. Keep calm and contribute. Each year and with each pay raise keep boosting your contribution percentage.
Servicemembers that are serving in a Combat Zone with a Combat Zone Tax Exclusion (CZTE) also have the additional benefit of contributing up to $56,000 in 2019. Of the $56,000, up to $19,000 can be a ROTH contribution, while the remaining $37,000 must come from contribution to the Traditional TSP. 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 ratio as compared to other retirement savings plans or investment brokers. In 2017, the TSP’s expense ratio was just .033%. Think of it as having an average net expense of 33 cents per $1,000 invested. Now, think about if your expense ratio was .1% instead of .033%. 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.
If you’re a newer servicemember, joining after 1 January 2018, or were eligible and decided to opt-in to the Blended Retirement System (BRS) you are automatically enrolled in the TSP! Automatically, 3% of your base pay is contributed to the TSP with each paycheck (you can always change this at anytime). After 60 days of entering the military, the DoD will also contribute an additional 1% of your base pay to your TSP. After two years of service, BRS participants can receive up to an additional 4% of their pay plus the 1% automatic match for a total of a 5% basic pay match from the DoD.
However, with all the awesome benefits of contributing to a TSP, would it surprise you to know that many non-BRS 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 hopeful that they’ll retire someday and collect a military 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.