Paycheck Chronicles

Thrift Savings Plan: The Basic Facts

One of the many benefits of serving in the military is the ability to contribute to the Thrift Savings Plan (TSP). TSP is a employer-sponsored retirement program similar to 401(k)s offered by private employers. Payroll deductions are invested into your choice of TSP funds, for use after retirement or under certain specific circumstances.

You an establish a TSP account via MyPay, and direct contributions to be made from each paycheck. You can select to contribute a portion of base pay, special pays and bonuses. In addition, you can change your contributions at any time, via the MyPay system.

There are two types of TSP accounts: traditional and Roth. A traditional account deducts the contributions from your paycheck before it is taxed, resulting in lower taxes in the year of contribution, but you pay taxes on the contributions and earnings at the time of distribution. A Roth account deducts the contributions from your paycheck after it has been taxed, but both the contributions and earnings are tax-free at distribution.

In addition to the tax benefits of either the traditional or Roth TSP, there is an additional Savers Credit available to lower-earning taxpayers who are contributing to retirement accounts.  If you are in a lower-income bracket, contributing to TSP becomes even smarter!

Once you've started a TSP account, it is important that choose a TSP fund that meets your investing preferences and your personal situation.  One of the most common complaints with TSP is that the account holder doesn't like something about their account.  Often, this is because their contributions have been sitting in the default G fund, which is an ultra-safe, low yield fund.  The G fund is a good holding place, but it is not designed for growth and, therefore, is not appropriate for most people.

Because TSP accounts are tax-advantaged retirement savings accounts, they have restrictions on removing the funds from the accounts.  In general, funds may be distributed once the account holder reaches retirement age.  There are provisions for loans or hardship withdrawals prior to retirement, but the TSP is the place for funds earmarked for retirement.

The Thrift Savings Plan is one of the best benefits of military service, and servicemembers who start saving early can leave the military with a substantial retirement account.  Don't let this opportunity  pass you by!

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