Thrift Savings Plan Basics for Service Members

There will always be a new trend everyone is talking about. Money included. Go anywhere on social media, Instagram, or TikTok, and there is a money trend. All that noise can make it easy to get caught up in trying to keep up instead of being focused on what is core to your financial success. Instead of jumping on a bandwagon that can crash and burn, we should focus on the basics. Or, more importantly, getting brilliant at the basics so when a trend comes along, we’ll have a firm foundation and know if that trend is going to help us build wealth and reach our goals. That’s why I’m doing a back-to-basics series on the MILMO Show. I’m going to do different shows on topics we should all have a basic understanding of like budgeting, the SGLI, insurance and more. I have no idea how many shows yet, but I’m going to kick it off with the Thrift Savings Plan and take it from there. Right now, you’re saving money for two people: yourself and your 80-year-old self. That means your money needs to be working double duty. Lucky for service members there’s a tool you can use to help your money work overtime. It’s called the Thrift Savings Plan, better known as the TSP. In this episode, I’m breaking down the basics you should know about the Thrift Savings Plan, like making smart investment choices, managing it while you’re in, and what to do with your TSP when you get out. Whether you’re new to the military, just starting to give your TSP a little love, or just looking for a refresher, this episode’s for you. Episode Transcript

What is the TSP?

Let’s take it from the top. What exactly is the Thrift Savings Plan? Basically, the TSP is a retirement savings plan for federal employees and members of the uniformed services. It’s a tax-protected account that allows you to squirrel away money for your future self. Think of it as a 401(k) for the military. Uncle Sam’s goal is to help you save and invest money for your retirement. If you’re willing to put money in savings, they’re willing to give you a leg up on your taxes.

Types of TSP Accounts

There are two types of Thrift Savings Plans, traditional and Roth. There are two because they are treated differently for tax purposes. The traditional TSP allows you to make TSP contributions before taxes are withheld from your military pay. This can lower your income and potentially lower the taxes you pay now. The second one is the Roth TSP which allows you to make contributions into your Roth TSP account after taxes have been withheld. This means you would pay the taxes now and be able to withdraw your money tax-free once you’re 59 and a half. Before I dive into the TSP further, it’s important to note the different types of retirement systems service members are eligible for based on the year they started or rejoined military service. Knowing what type of retirement system you are in is important because you may or may not have additional TSP benefits like matching, which I’ll get into in a minute.

Military Retirement Systems

The two main ones are the High 36 or the Blended Retirement System, better known as the BRS. The High 36 is a Defined Benefit plan for those who joined or rejoined between September 8, 1980, and January 1, 2018. It’s called the High 36 because they take the average of your highest 36 months of pay and times that by 2.5% to determine your monthly pension amount. With the High 36 you have the option to contribute to your TSP account. The BRS is a mix of a Defined Benefit plan and a Defined Contribution plan. Under the BRS, the Defined Benefit portion works the same as High 36 only the multiplier changes from 2.5% to 2% to determine your pension. The big difference with the BRS is that you receive matching contributions to your TSP account from the government to help you save for retirement.

Starting Your TSP Account

If you’re new to the military, welcome! The good news is that nowadays, enrolling in the TSP is super easy. They do it for you when you are in the BRS. When you first join, you’re automatically enrolled in the TSP, and a portion of your pay is automatically contributed to your account. This is a great way to start building your retirement savings without having to think about it. Your contributions are initially set at a default rate. If you joined on or after October 1st, 2020, you’re automatically in the Blended Retirement System, and your default contribution rate is 5% of your Basic Pay. Your 5% contribution is deposited into your Traditional TSP account every pay period. If you joined or rejoined the military on January 1, 2018, and September 30, 2020, your automatic contribution rate is 3% of your Basic Pay. If you joined the military prior to January 1, 2018, and opted into the BRS. You do not have an automatic contribution rate, you have to set it yourself. You can increase or decrease your contribution percentage to fit your financial goals. To do this, you’ll need to log in to your MyPay account and adjust your TSP contributions. You can choose to contribute a percentage of your basic pay, incentive pay, special pay, or bonus pay. The maximum you can contribute each year is set by the IRS, and for 2024, that limit is $22,500. If you’re in the BRS and decide to stop contributing to your TSP at any point during the calendar year, on January 1st of the following year, you will be automatically re-enrolled in 5% contributions unless you go in again and stop or change the percentage. Again, it is only if you stop making contributions that you will be renenrolled at 5%, not if you change it to, let’s say, 10% of your Basic Pay.

Matching Contributions

One of the best parts about the TSP is that the government offers matching contributions for service members who are part of the BRS. If you’re in the BRS, the government will automatically contribute 1% of your basic pay to your TSP account, and they will match up to an additional 4% of your contributions. So, if you contribute 5% of your pay, you’ll have a total of 10% going into your TSP each month. That matching 5% is free money, so you should take advantage of it! Would you walk past a person handing out free $100 bills once a month by your house? Not taking the match in your TSP or any retirement account that offers matching contributions, is the equivalent of walking past a person trying to give you $100 to help you build your wealth. You would be crazy to say no thank you. I’d like to earn it the hard way instead. You can sacrifice not going out to eat every other night so that you can give 5% of your pay to make sure you take the free money.

Choosing Your Investments

Once you’ve got your account set up through and contributions rolling in through your MyPay account, the next step is to decide how to invest your money. The TSP offers five core investment funds. I’ll give you a quick overview of each. 1. G Fund (Government Securities Investment Fund) This fund invests in government securities and is designed to preserve capital while earning interest. 2. F Fund (Fixed Income Index Investment Fund) This one invests in bonds and aims to match the performance of a broad bond index. 3. C Fund (Common Stock Index Investment Fund) This fund tracks the performance of large U.S. companies and is similar to an S&P 500 index fund. 4. S Fund (Small Cap Stock Index Investment Fund) This fund focuses on smaller U.S. companies and aims to match the performance of the Dow Jones U.S. Completion Total Stock Market Index. 5. I Fund (International Stock Index Investment Fund) This fund invests in international stocks from more than 20 developed countries, excluding the U.S. In addition to these core funds, there are Lifecycle (L) Funds, which are the same as civilian Target Date funds. They are designed to take the guesswork out of investing by allocating your contributions to the core funds for you. These funds automatically adjust the mix of investments based on your target retirement date. If you’re nervous or new to investing or prefer a hands-off approach, the L Funds can be a great option. There is also a window in your TSP to contribute to Mutual Funds, which is somewhat new. To be eligible for this, you need at least $10,000 and be able to cover the fees, which add up to $150. Additionally, you pay $28.75 per trade. Remember, you can make adjustments to your investments through your account, not MyPay. MyPay is for the money.

Managing Your TSP During Your Career

Your TSP is not something you set and forget completely. It’s important to occasionally review and adjust your TSP contributions and investment choices throughout your military career. We’ve all heard the horror stories of people leaving their money in the G Fund their entire career. You don’t want that, so be sure to review and adjust. Also, don’t forget that life events like promotions, deployments, and changes in your financial situation can all impact your retirement planning and will require you to make adjustments. You can increase or decrease your contributions at any time through MyPay. If you receive a bonus or special pay, consider directing some or all of it to your TSP. Remember, the more you contribute, especially when you’re eligible for matching contributions, the more you’ll benefit in the long run.

What to Do with Your TSP When You Leave the Military

When it’s time to leave the service, whether you’re retiring or transitioning to a civilian career, you’ll need to decide what to do with your TSP. You have several options: 1. Leave it in the TSP Your account can stay with the TSP, continuing to grow and benefiting from the plan’s low fees, which is usually the best option. 2. Roll it Over You can transfer your TSP balance to another qualified retirement plan, such as a 401(k) or an IRA. This can be a good option if you want to consolidate your retirement accounts. 3. Withdraw It You can take a lump sum or set up monthly payments. Keep in mind that withdrawals before age 59½ may be subject to taxes and penalties unless you qualify for an exception. If you are younger than 59, this should be a last resort, like a catastrophic medical event. There are some people that will encourage you to take all of your TSP funds out to buy an annuity outside of the ones available with the TSP It’s also important to note that if you stay in the TSP, you can continue to manage your investments and make changes as needed.

Making Withdrawals

When you reach retirement age, you’ll start thinking about withdrawing money from your TSP. You can choose from different options: 1. Installment Payments You can set up automatic monthly, quarterly, or annual payments. With installment payments you still have the ability to change your investments in the TSP funds around. 2. Single Withdrawal Take out all your money at once. This option may have significant tax implications. You also have the option to take partial withdrawals. 3. Annuity You can purchase an annuity with your TSP funds to receive guaranteed monthly payments for life, but you give up all control of your money when you do that. I’m not a fan of this. There’s a small group of people this may be good for, so if you are thinking about the annuity route, I would talk to a financial planner before ever making that decision. Especially if you are being encouraged by someone outside of the TSP to withdraw your funds and purchase an annuity. The keyword there is purchase. Often, when someone wants you to buy an annuity, they get a huge commission if you make that purchase. In other words, they receive a benefit, but that benefit may hurt you in the long run. Each withdrawal option has its pros and cons, so it’s important to plan ahead and seriously consider consulting with a financial planner to determine the best strategy for your unique situation.

What Happens to Your TSP When You Die

No one likes to think about it, but it’s crucial to have a plan for your TSP in case something happens to you. When you set up your TSP account, you should designate a beneficiary. This ensures that your TSP funds go to the person or people you choose. If you don’t designate a beneficiary, your TSP will be distributed according to the order of precedence set by law, which typically starts with your spouse, then your children, and so on. Updating your beneficiary information is easy and can be done online through the TSP website. Make sure to review and update your beneficiary designations after major life events like marriage, divorce, or the birth of a child. There are too many horror stories of TSP and SGLI going to ex-spouses because the service member did not update their beneficiary designation, so make sure to do that.

Recapping TSP Basics

Now for the wrap-up. Those were the basics of the TSP. The Thrift Savings Plan is a powerful tool to help you prepare for your financial future. Understanding the basics will help you make informed decisions about your hard-earned savings that are best for you and your future self. Related episode: Understanding Funds for your TSP and 401k

Thrift Savings Plan Basics Resources

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