The Military Retirement Advantage: Thrift Savings Plan

Michelle Barron |
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There are a variety of options that can help you save for the retirement of your dreams. Company retirement plans can be a crucial investment vehicle as millions of workers depend on the money, they have invested in them, to help meet their retirement goals. Today, 401k type plans, which have been around since 1978, have grown to become the most popular type of employer-sponsored retirement plan in America. Even though the armed forces have a long history of offering post-service benefits, defined contribution plans were not available for the military until 2001 with the Thrift Savings Plan (TSP) implementation for military personnel.

TSP plans are the government’s version of the 401(k). Like the private sector retirement plans, military retirement benefits have undergone many changes to keep up with the changing times over the years. New rules even allow the TSP plan to be portable between the public and private sectors. Sadly, the Thrift Savings Plan is often overlooked. It shouldn’t be; it offers some distinct differences and advantages for military members.  

The Basic Training

The thrift savings plan is a government sponsored, defined contribution plan and offers a way to save a percentage of your income for retirement. Like some 401(k)s, you can choose whether you want to reduce your taxes now and put money away tax-deferred in a traditional plan, or if you want to deploy the Roth TSP option, you can contribute after-tax dollars. If you think you’ll be in a higher tax bracket now than in retirement, it makes sense to defer the taxes and invest in the traditional TSP. If the opposite is likely to be true, a Roth TSP may be the right option. 

Beyond the benefits of traditional employer-sponsored retirement plans, the TSP offers unique benefits only to uniformed service members. Contributions made to a Roth TSP during deployment to a tax-exempt combat zone never accrue a tax liability, nor do the investment earnings from those contributions, if the withdrawal is qualified. That essentially makes those contributions triple tax-free. Uniformed service members who contribute tax-exempt combat-zone pay into a traditional TSP will not have to pay taxes on contributions. Still, they will have to pay taxes on the earnings of those contributions upon retirement.

The actual saving part is easy because it’s now automatic. Since October of 2020, your enrollment in the TSP begins after 60 days of service. Five percent of your basic pay each pay period is deducted from your paycheck and deposited into the traditional balance of your TSP account unless you made an election to stop or change your contributions. If you’ve been investing in the TSP plan for a while, you should verify that you contribute at least 5%. The automatic contribution has increased over time, so it may be lower depending on when you joined. Uniformed service members can elect changes through myPay

Sizing up the Investment Terrain

Hats off to the TSP. They have done a great job of keeping it simple by offering basic low-cost investment options. In fact, TSP may have the lowest investment cost of any investment vehicles out there. Participants can customize their investments according to their risk tolerance or utilize a series of Lifecycle funds geared toward a set retirement date. The lifestyle funds invest in the same available funds but rebalance automatically and reduce risk over time. Here is a quick summary of the basic investment options available, covering the major asset classes needed for diversification.

The G Fund

This fund invests in government securities and is considered the safest fund. You won’t lose the money you put into this fund, but your potential rate of return is the lowest.

The F Fund

This fund invests in U.S. Government, mortgage-backed, corporate, and foreign government bonds. Your risk is relatively low, but your potential rate of return is too. Bonds are typically known for offering stability in investment portfolios rather than providing high returns.

The C Fund

This fund invests in the stock market. The fund consists of the Standard and Poor’s 500 (S&P 500) Index, a mix of 500 large to medium-sized U.S. companies. If the stock market goes up, you can make money - if it goes down, you can lose money. The risk is higher than the F fund, but the potential rate of return is higher too.

The S Fund

This fund invests in the stock market too, but instead of big companies, it invests in smaller companies that aren’t in the S&P 500. The risk is even higher than the C fund, but the potential return rate is even higher. 

The I Fund

This fund invests in international stock markets. This is the may riskiest fund, but you may also have the potential for the best return rate. 

Some Hazards to Avoid

When it comes to reaching your retirement goals, it is essential to maximize your savings. Start by making sure that you are not leaving free money on the table. Contribute at least 5%, and you will be taking advantage of a full 5% match. Contributing anything less is passing up free money. Retirement savings don’t have to stop at the 5%. As of 2021, the IRS currently allows participants under 50 to differ up to $19,500 of income annually to an employer-sponsored plan. The catch-up provision allows those over 50 to contribute another $6,500. 

The next step is getting invested. It’s a good idea to select the funds that make up your allocation by thinking about your goals and your risk tolerance. You want to find a balance between creating enough growth and not taking so much risk that you’ll be worried if markets have a downturn. For many investors, creating an allocation that starts with 80% stocks in the early stages of your career and gradually declining to 60% stocks as you get closer to retirement may work well. Still, it’s all about how you feel about taking investment risk, your personal goals and situation. Rarely does the one size fits all investment advice fit everyone; a financial advisor can help sort through your options and help create a more customized plan that can help you meet your goals.

As life changes, you also should stay current with your beneficiaries; these may need updating. It’s easy to overlook, but it makes a big difference in protecting and caring for the people you love. If you do not remember if you submitted a designated beneficiary, look at your annual statement, check the online wizard, or call the Thriftline at 1-877-968-3778.

Mission Accomplished: Retirement

At one time, distribution options were limited under the Thrift Savings Plan, making it challenging to keep your funds within the TSP plan and accommodate various distributions. However, effective September 15, 2019, TSP updated the withdrawal options and now offers a lot more flexibility. Currently, there are three basic methods of withdrawing money from your TSP account: single withdrawals, installments payments, or annuity payments. You can use one of these methods or any combination of them that you choose. There is no limit to the number of withdrawals you can take after you retire. However, you are limited to no more than once every 30 calendar days.

Even with the low cost and new flexibility, keeping your funds in the TSP plan is not for everyone. You can roll your TSP account into a traditional or Roth IRA without creating a tax consequence. Traditional and Roth IRAs can offer an abundance of investment options, active management, and the ability for tax benefits with the use of qualified charitable deductions.

Making an informed decision is critical, as all the available options have both pros and cons, and some options are permanent. Before making decisions, it makes sense to consult with both a financial and tax advisor to make sure you understand your options and the potential impacts of your choices. 

Wrapping It Up

The Thrift Savings Plan is an excellent way to save for retirement automatically and offers benefits specific to uniformed service members. In most cases, though, the TSP won’t be enough by itself to support your retirement needs. You should treat your TSP account as an important part of your overall retirement plan. If you haven’t thought about yours lately, it might be time to do a little recon and make the most of your earned benefits. If you need assistance, reach out to us at info@rivercitywealth.com, we are happy to help.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal, or tax advisor for specific information pertaining to your situation. Investing involves risk including loss of principal.  Past performance is not indicative of future results.