Among the many benefits of working in the military, service members have access to the Thrift Savings Plan (TSP), which is like a 401(k) retirement savings program for members of the military and federal employees. The TSP makes it easy to invest automatically from your pay, provides important tax benefits and charges lower average net expenses than most private sector 401(k) plans. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.
Here's how to make the most of your TSP retirement savings opportunity.
- Get started. If you are member of the uniformed services and participating in the Blended Retirement System (BRS), you are automatically enrolled in the TSP after completing 60 days of service. At that time, your service contributes an amount each month equal to 1 percent of your basic pay into a traditional TSP account in your name. This “Service Automatic Contribution” does not come out of your pay but is a retirement benefit. Your service also automatically begins deducting a portion of your basic pay each pay period from your paycheck for deposit into your TSP account. And after two years of service, you are eligible for matching contributions.
If you are a member of the uniformed services not covered by the Blended Retirement System (BRS), you may sign up for the TSP through your service’s electronic payroll system (typically myPay or Direct Access).
- Learn about your TSP options. You can choose between two different tax treatments for your TSP: Traditional or Roth.
Traditional: Traditional contributions are made before taxes are taken out. The money invested lowers your taxable income (adjusted gross income) now and grows tax-deferred until you withdraw it in retirement.It is possible to make a combination of traditional and Roth contributions into your TSP account, but keep in mind that the total of these contributions cannot exceed the annual limits set by the IRS.
Investing a little bit with each paycheck makes saving more manageable. And since the savings is pre-tax, the impact on your take-home pay is less than the full contribution amount. For instance, contributing $350 pre-tax twice a month only lowers each paycheck by $262.50, but adds up to $8,400 in contributions by the end of the year. Use our Savings Calculator to see how much your contributions can grow over time.
Roth: Roth contributions to the TSP come from after-tax income, which reduces your take home pay and does not reduce the gross income reported to the IRS. Qualified withdrawals, however, are tax-free. To be considered qualified, your Roth TSP account must have been opened for at least five years, and you must be either 59½ or older or permanently disabled. While you do not have to pay taxes on the contributions portion (the amount you paid in to the TSP) of any withdrawal, you will have to pay taxes on the earnings portion of the withdrawal, plus a 10 percent penalty if the withdrawal is considered non-qualified. For more information, read the TSP’s Important Tax Information About Payments From Your TSP Account.
As with an employer-sponsored Roth 401(k), there are no income restrictions limiting who can participate in the Roth TSP. The only requirement is eligibility to participate in your employer's plan. A Roth option might make sense for you if you think your tax rate is likely to be higher in retirement.
- Decide how much to invest. Whether or not you have been automatically enrolled at a set level, you may choose how much to contribute to your TSP each year up to a maximum amount set by the IRS. This is known as the IRS elective deferral limit. The elective deferral limit applies to the combined total of traditional (pre-tax) and Roth (post-tax) contributions. For uniformed services members, this does not apply to traditional contributions from combat-zone pay.
At any time beginning in the year you turn 50, you have the opportunity to make additional contributions above the IRS elective deferral limit. These catch-up contributions provide a chance to put away extra money for retirement.
The annual additions limit is the total amount of all contributions into your account in a calendar year, per employer, including money from all sources: employee contributions (tax-deferred, after-tax, and tax-exempt), Agency/Service automatic contributions, and agency/Service matching contributions. It does not, however, include catch-up contributions.
Learn more about the annual limits from the TSP.
- Pick your investments. The TSP has a variety of investing options, from short-term U.S. Treasury securities to index funds made of domestic and international securities. Or you can simplify your investments by choosing a Lifecycle (L) fund. The L Fund creates a diversified portfolio made up of a combination of the other funds, which automatically shifts the allocation of the investments from more aggressive to more conservative based on the date when you will need to use your money. Some savers like the convenience of an L Fund and some other lifecycle funds because you don't have to worry about making allocation decisions yourself—they are made automatically, based on your age and planned date of retirement.
If you won't retire for many years, or even many decades, and are willing (and can afford) to take risk, you might decide to ride out the market's short-term fluctuations with the goal of reaping the potential for higher returns that stocks historically have offered over the long term. On the other hand, if you are very close to retirement age, have few assets, or cannot afford to put your assets at risk, you may decide to construct a portfolio consisting of less risky investments.
Get more information from the TSP about investment options and how to invest.
- Boost your contributions while deployed. Deployment, when your paycheck is larger because of the tax breaks and combat pay, could be the perfect time to boost your contributions. Tax-free income you contribute while deployed is never taxed when you withdraw the money from the TSP. If you're receiving tax-free income in a combat zone, check out the contribution limit for this year.
Saving for retirement is an important step on the path to a secure financial future, and the TSP is one of the lowest cost ways to save.