Paycheck Chronicles

Retirement Week: Thrift Savings Plan


Today's National Save for Retirement Week topic:  the Thrift Savings Plan (TSP.)  TSP is the most important part of a savings plan for someone who is current serving the military or working for the federal government, because TSP funds belong to you, regardless of how long you serve.  For the 83% of service members who do not continue serving until eligible for military retirement pay, TSP is the place where they can accumulate significant retirement savings in a tax-advantaged retirement account.

What Is A TSP Account?

TSP is a "defined contribution" plan, which means that the value of the account is derived from the amount of money that the owner contributes.  Within the plan options, the owner decides how the funds are to be invested, with a variety of fund types available to choose.

If you are familiar with how a civilian 401(k) works, TSP is nearly the same.

How Do I Contribute To A TSP Account?

Military members contribute to a TSP account through payroll deductions.  The member designates a certain percentage of their base pay, special pays, and bonuses to be contributed to their TSP account, up to the yearly limit for contributions.  This is easy to do via the military's MyPay online pay account system, and changes can be made throughout the year.

What Are The Tax Advantages?

TSP contributions can be put into a traditional TSP account, a Roth TSP account, or a combination of the two.  Traditional TSP accounts are tax-deferred, meaning that you receive a break on your income taxes during the year in which you contribute the money to your account, but you pay taxes on the contributions and growth when you take the money back out.  Roth TSP accounts receive their tax advantage at the distribution side:  contributions are taxed as regular income when the money is put into the account, but the contributions and the growth are tax-free when distributed.

In addition, some lower-income earners can receive a significant federal income tax credit for their contributions to a TSP account.

Why TSP?

TSP offers two major advantages over other  tax-advantaged retirement savings.  First, the contribution limits are significantly higher than for Individual Retirement Arrangement (IRA) accounts.  Second, the fees for TSP are pretty much the lowest fees available for a tax-advantaged retirement program.

Most military members will separate from the military without earning military retirement pay. Contributions to TSP or IRAs will be the only retirement savings that come from a time of military service. It is essential that you contribute to these accounts so that you do not leave the military with no retirement savings, and TSP is an excellent tool to accomplish that goal.

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