The Thrift Savings Plan (TSP) is the government version of a 401(k) retirement account. The Thrift Savings Plan offers both a regular retirement account and a Roth retirement account.
The Thrift Savings Plan is preferred over civilian retirement accounts because of the low fees associated with the plan options. Every retirement account invests your retirement money into different funds selected by you, these funds charge a management fee for invested money. The lower the fees, the more money comes back to you instead of going to the fund managers.
Investing in the TSP also takes advantage of the tax benefits of military service. Because Basic Allowance for Housing and Basic Allowance for Sustenance are not taxed, military members often have a lower taxable income than they would if they were in a civilian position.
Because of the lower taxable income of military members, it is often recommended that service members invest in the Roth TSP rather than the traditional TSP. The difference between a Traditional retirement account and a Roth retirement account is when the money is taxed. A traditional retirement account is taxed as income when you withdrawal the money during retirement. A Roth retirement account is taxed as income when you deposit the money into the Roth retirement account.
Why does this matter? Since you are in the military, you have a lower taxable income than you would if you are a civilian. So if you deposit the money in to the Roth TSP, you will pay less taxes overall because you currently fall into a lower tax bracket than you will when you retire and start withdrawing funds from your retirement account. If you invest in a traditional retirement account, you will pay taxes on your income as you withdrawal money from your retirement fund in retirement.
So how do you know if you should invest in the Roth TSP or traditional TSP? It depends on how much you plan on withdrawing from your retirement accounts upon retirement. If you are planning on withdrawing $50,000 a year and your current taxable income is $30,000, then you should invest in the Roth TSP. If you are making $90,000 a year and you plan on living off of $50,000 a year in retirement, then the traditional TSP would be better because you will have less income in retirement and pay less taxes.
So how do you get started with investing in the TSP?
First, you need to create a MyPay account here.
If you have a SmartCard/CAC, click on SmartCard log-on on the left-hand side, below the log-in options.
If you do not have a SmartCard/CAC, read this guide on getting a password.
Once you are logged in to MyPay, click on "Traditional TSP and Roth TSP"
This option takes you to a page with a large block of text. This is really good information. I reposted it here so you can read it. This is good information.
- The Thrift Savings Program provides an opportunity to invest in your future.
You have the opportunity to elect percentages of
your pay for Traditional TSP and for Roth TSP.
- What should I consider when I elect
Traditional or Roth TSP? Carefully calculate the percentages of basic
pay, incentive pay, special pay and bonus you wish to contribute to TSP, and
remember to consider your other monthly obligations. Determine your ability to
maximize your TSP contribution while maintaining enough funds to support your
lifestyle. The percentage you elect will be applied on a daily basis. If you are
not currently receiving incentive pay, special pay or bonus pay, your election
will take effect whenever you become entitled to this pay. Your TSP elections
will stay in effect until you submit another election to change or stop your
contributions, or you separate from service. For example, if you elect to
contribute from bonus pay, your election will cover future installments or any
other bonus pay to which you become entitled.
Keep in mind that Roth TSP is an after tax contribution; so you must consider this when selecting percentages of pay to contribute, for example, an election for 100% of a bonus may not process since it does not allow for taxes and other deductions.
Your elections will overlay all prior elections, so each Traditional and Roth percentage elected must be filled. If you do not wish to have a particular election, for example, if you don’t want a bonus contribution to Roth, enter zero in the Roth bonus contribution percentage.
- Annual maximum: The maximum Internal
Revenue Code (IRC) contribution elective deferral limit for 2014, which is the
combined total of your Traditional deferred contributions and Roth
contributions, is $17,500. Also, the IRC annual addition limit for 2014, which
includes exempt Traditional contributions as well as Traditional deferred
contributions and Roth contributions, is $52,000. Roth contributions can be made
from combat zone tax exempt pay as well as post-tax pay, however, the annual
limit for Roth remains at $17,500 even if you are in a combat zone. Exempt
contributions above that amount can only be made to Traditional TSP. However, as
an exception to the limits described in this paragraph, deferred contributions
can also be made to Traditional catch-up; and deferred or exempt contributions
can also be made to Roth catch-up, if you are eligible (see catch-up).
- Other deductions to consider: Also
consider all current deductions such as: forfeitures, Social Security and
Medicare tax (7.65% of basic pay), federal income tax withholding,
Servicemembers’ Group Life Insurance (SGLI), Family SGLI, state income tax
withholding, debts, garnishments, bankruptcies, tax levies, alimony, child
support, and any fines. Traditional TSP and TSP loans are deducted before Roth
TSP. If there is not sufficient pay available for the amount you elected for
Roth TSP, no contribution will be made.
- 1% Basic Pay Requirement: If you elect to contribute to EITHER Traditional or Roth TSP from basic pay, you may also elect to contribute from 1% to 100% of any incentive pay, special pay, and bonus pay that you receive (within the IRC annual limits) and within the amount available after deductions.
- What are the rules for stopping
contributions? If you Stop your basic pay contributions, your service
will automatically terminate your contributions from special pay, incentive pay
and bonuses. However, you may stop contributing from incentive pay, special pay
or bonus pay and still continue your contributions from basic pay.
- TSP address: You may change your
Thrift Savings Plan (TSP) address information at any time. You may make your
address change through myPay if you are currently contributing to TSP. Your TSP
address change will be sent to update your personal account information. You
must contact your customer service representative to change your address if you
are NOT currently contributing to TSP. Please do
not make a TSP address change if you have made one in the last three
days.
- Allocation: To change the allocation
of your TSP contribution among G, F, C, S and I investment funds, see the TSP
Web Site at www.tsp.gov
- Financial Hardship Withdrawal: If you make an in-service financial hardship withdrawal, you may not make any TSP contributions for six months following the withdrawal.
This is where you put in the percentages for how much you want to contribute to either the Traditional or Roth TSP.
You generally want to contribute from your Basic Pay. What is special, Incentive, and Bonus pay?
So if you have a enlistment or reenlistment bonus coming up or receive some kind of special or incentive pay, make sure you have a percentage designated before it comes through.
Make sure you scroll down and make sure your address is correct and you hit save.
If you are deployed, check out the Savings Deposit Program. Which you can also access through MyPay.Once you have elected to contribute to the TSP, you need to create an account at tsp.gov
The most important part of the Savings Deposit Program is this:
A total of $10,000 may be deposited during each deployment and will earn 10% interest annually. You cannot close your account until you have left the combat zone, although your money will continue to draw interest for 90 days once you’ve returned home or to your permanent duty station.
Creating an account on the TSP website is a pain in the butt. Your 13 digit account number will be mailed to you after you complete the previous step by starting your contributions to the TSP. Once you receive this account number, you can create an account and create an individual user ID.
DO NOT FORGET YOUR LOG-IN INFO! TSP USES SNAIL MAIL FOR ALL ACCOUNT INFORMATION INCLUDING ACCOUNT NAME REMINDERS AND PASSWORD RESETS!
Once you get your tsp account set up and log in, you will want to move your money out of the G fund. You can use a lazy portfolio or just put everything into a target date retirement fund. The primary determination of which funds to put your money in is the amount of risk you are willing to take. The G fund is a low payout fund, but it is unlikely to decline in value.
Generally, you should take more risk when you are young and less risk when you are closer to retirement.
The easiest thing to do is to set your contribution allocations to put everything into a target date retirement fund. Basically, you do the math to figure out the year you are likely to retire (such as 65 years old) and select the target date fund close to the year of your retirement. Target date funds are designed to take more risk in the beginning and re-balance to a less risky contribution allocation as you get closer to the year of your retirement.
Once you have done all of this, congratulations, you have only just started planning your financial future.
The next step is to keep learning. The following links will help you learn about all facets of personal finance. Take the time to learn about money so you can make it work for you and make smart decisions!
http://www.reddit.com/r/personalfinance/
http://www.reddit.com/r/personalfinance/wiki/faq
http://www.bogleheads.org/wiki/Main_Page
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