Yahoo Finance 5 Things You Need to Know About the Thrift Savings Plan
If you're a member of the military, a federal employee or someone who otherwise has access to the federal government's Thrift Savings Plan, you could be in luck. Managed properly, the TSP is an excellent investing vehicle that works similarly to a 401(k) plan. Here's what you should know if you're a TSP investor:
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
1. You could get a match, but it might change your pension. The government will contribute 1 percent of your base pay automatically into your account for many employees, whether you're investing or not. However, vesting works differently for different types of employees, so be sure you understand how these rules work for your particular position. Most workers need three years of job tenure before they can keep the 1 percent contribution if they leave the job, although the vesting requirement is shorter for some types of employees. The employer contributions are forfeited if you leave the job before you are vested in the TSP.
Another more recent benefit of the TSP is that some employees can get an employer match from the government if they contribute up to 5 percent of their base pay to the plan. The first 3 percent of your pay that you contribute to the plan is matched dollar-for-dollar, while the next 2 percent is matched with 50 cents for each dollar you contribute. That's basically free money, so you don't want to miss out on it.
However, one thing to note about claiming the TSP match is that it could reduce your pension. Military members who joined the service between January 1, 2006 and December 31, 2017 get a choice to remain in the current pension system or combine a TSP match with a reduced pension. People who join the military in 2018 or later will automatically be part of the new system.
2. You can choose between a traditional and Roth option. As with many other types of retirement plans, you can choose to invest pre-tax or after tax. If you choose a Roth-style TSP, you will invest after-tax money now, but you won't pay taxes on withdrawals later in retirement. If you invest in a traditional TSP, you will invest pre-tax now but pay taxes later. Either way, your investment will grow tax-free as long as you follow the plan's rules.
You can also have both a traditional and a Roth TSP if you choose to set it up that way. A Roth account can often be a better investing option over the long term because you likely won't have to pay tax on the withdrawals in retirement when you can least afford to pay it. The government match can be deposited only in the traditional TSP option. So if you choose to contribute your own after-tax money to a Roth TSP, your matching contributions will automatically wind up in a traditional TSP account, which adds tax diversification to your portfolio.
[Read: Retirement Planning Decisions You Might Later Regret.]
3. Contribution limits are the same as a 401(k) plan. The contribution limits for the TSP are set up to be the same as those for a 401(k). These limits are higher when you reach age 50, after which time you can make additional catch-up contributions. The limits also increase to keep up with inflation, and may change from year to year.
For 2016, you can make regular contributions of up to $18,000. If you're 50 or older, you can contribute up to $24,000. However, if you're a deployed service member or are serving as a civilian in a combat zone, you may be able to contribute up to $53,000 in a single year. This is a huge tax benefit if you can take advantage of it.
4. The fees are very low. The TSP is well known for its incredibly low fees. Last year, the average net expense was around 29 cents for every $1,000 invested, which is lower than many 401(k) plans. The government uses forfeited employer contributions from those who leave the plan to cover some of the expenses of the plan, which helps keep costs low for longer term employees. This means you get a reduced investing cost, which can save you some serious cash over the long haul.
These low costs help participants to build wealth faster. The most powerful force when saving for retirement is compounding interest, and investing fees eat into that compounding interest. Over twenty years of investing, a fraction of a percentage point can make a huge difference in your total savings.
[See: 10 Ways to Get Ready for Retirement After Age 50.]
5. You have a variety of investment options. The TSP provides several low-cost investment options. You can split up your investments between the funds however you like. You can check out a fund's past performance and key features of the investment on the TSP website.
Investing in the TSP isn't much different from investing in a civilian 401(k), but it does have some advantages. So if you have access to this retirement saving option, don't let it go to waste. Be sure to do your homework and make your TSP investments work for you.
Abby Hayes is a freelance blogger and journalist who writes for the personal finance blog The Dough Roller, which covers topics ranging from credit scores and banking to how much money you should be saving.
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