Things to be Aware of Regarding Your Thrift Savings Plan

A majority of articles about retirement planning are focusing on 401(k)s. Nonetheless, military personnel and federal employees save for their retirement in a different type of account referred to as Thrift Savings Plan or the TSP.

In a few ways, the functioning of the TSPs can be similar to that of 401(k)s. Participants make their contributions with their employer opting to match the offer. The limit for annual contribution is $18,500 and an additional $6,000 catch-up contribution to individuals aged 50 or older.

Similar to the majority of 401(k)s, TSP can provide other options that are traditional and Roth.  For traditional TSP, participants can make pre-tax contributions and not pay taxes on withdrawals of your retirement money. Opting in for Roth option, contributions made are post-tax income and tax on withdrawals is not paid.

There is a possibility of having at the same time both the traditional and Roth TSP. The red flag that is interesting is prevalent since the government matching contributions can be made through traditional TSP. This means that even though you contribute to a Roth TSP, you can still own the two types of accounts and have some added tax diversification benefits.

How TSPs Performs for Different kind of Employees

There is a slight difference in individuals TSP account, and it depends on whether you are a civilian government employee or in the military:

Federal Workers

-Federal Employees Retirement System: Federal civilian employees who started working from January 1, 1984, or after all considered FERS. Those who were hired after the end of July 31, 2010, they are enrolled in a traditional TSP automatically with 3% of their basic salary deducted and deposited in their account unless they decide to change or stop making contributions. Employees in FERS that are hired prior to August 1 2010, the TSP contribution from their agency is 1%, and they can decide to contribute more.

-Civil Service Retirement System (CSRS): This particular retirement system is for federal civilian employees that were employed prior to January 1, 1984. After making a contribution to the agency, they will assist CSRS employees’ in establishing the accounts.

Military

Since 80% of uniformed military members do not serve for 20 years required to becoming eligible for a pension, majority walks away from the service without anything for retirement. Enactment of the Blended Retirement System (BRS) is hoping to change this situation. It enables individuals to choose either pension or TSP or have all of them by choosing the one with the best option depending on the current years they have served.

Any person joining the military now is automatically in the BRS. They will automatically receive 1% of their base pay contributed to TSP, and they can opt to add 4% and receive a total match of 5%. After completing 20 years of service, they will still receive a pension, but it will be reduced.

Individuals with over 12 years in the service, the pension will be a better bet since the 5% match on a TSP will not offset the higher pension they could get if they did not have TSP.

This is the point of having served for 8 to 12 years in the military. This is whether they stayed in the old system or switched to the BRS depending on their situation.

TSP Investment Choices

You can select from five index funds or various lifecycle funds that are composed of a combination of the five index funds. These types have far fewer investment options offered by majority of employers in their 401(k)s and are available to choose from a small number of options that is less confusing.

G Fund: As its name states, the Government Securities Fund are invested in U.S. government securities. This is because of its lower volatility and individuals can earn interest income without fearing to lose their principal investment.

F Fund: Fixed Income Fund investment is made in government, corporate, and bonds that are mortgage-backed with an aim to matching Bloomberg Barclays U.S. Aggregate Bond Index performance. The fund offers risk ranging from low to moderate level.

C Fund: Common Stock Index Fund is matched with S&P 500 that is composed of U.S. companies from medium to large. The fund has a moderate risk level.

S Fund: Small Capitalization Stock Index Fund is less risky since investments are made in small and medium-sized U.S. companies that are not found in the C Fund. The Dow Jones U.S. Completion Total Stock Market Index matches the fund.

I Fund: International Stock Index Fund is matched by the way MSCI EAFE (Europe, Australasia, Far East) index performs and is composed of over 20 developed stocks.

L Fund: L Fund is selected based on individual retirement time horizon, and it is the same as target-date or lifecycle funds with the funds shifting gradually from being aggressive to moderate and conservative as a person is nearing retirement. Having the retirement age in mind, individuals can select a fund that will target the closest year to when they turn to that age.

A huge TSP fund options benefit is that they entail lower expense ratios of around 40 cents for every $1,000 that is invested. This is better since a fraction of a percent rise to expense ratio of the fund will significantly lower person retirement savings in 20 or 30 years.

Not opting for an L Fund, can lead to the creation of the best combination of the other five funds. It is essential to highlight investment options you take care of and choose the one appropriate for you. It is important to be aware that default fund allocations cannot match your particular goals.

Contributions are deposited automatically into the L Fund if an individual enrolled in a TSP on or after September 5, 2015, that is targeted towards the time you turn 62 years. If enrollment were prior to this date, the contributions would be deposited to a G Fund that is not aggressive enough while having a long time horizon.

Matching Contributions

BRS members and FERS employees receive an automatic contribution of 1% to the base pay of their TSP whether they contribute or not. From this point, you can receive a match on your additional contributions reaching up to 5% of the salary.

After three years, the majority of FERS employees 1% contribution is vested with that of BRS, and a few FERS employees will be after two years. The match on these contributions does not need vesting.

Selecting Beneficiaries

It is important to choose your TSP beneficiaries and keep the list updated in case you bear children or get a divorce.

Beneficiaries will get the money if you have less than $200 or less in your TSP after passing away. Those with above $200, the money stays invested with the establishment of a beneficiary participant account in their name.

Where to Begin?

To individual’s eligible for participating in TSP, it is highly recommended to contribute enough amounts that will get 5% match.

If you qualify to a Roth IRA, you can contribute up to $5,500 per year. Following this, you can keep on taking advantage of the ability to lowering your taxable income through contributing an annual maximum of up to $18,500 to your TSP.

An individual with more money available can invest further by setting up a separate after-tax brokerage account.