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!

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • ken

    Lets say you contribute $12,000 a year in a traditional TSP. Your taxable income goes down by $12,000, and taxes would have amounted to $3000 on that $12,000. You don’t pay the $3000 in taxes and you contributed $9000 for a total of $12,000. Your cost to invest is $9000 to invest $12,000.

    • Kate

      That’s exactly right. If you are in a lower-income bracket, you can save even more with the Saver’s Credit, which will give a tax credit of up to 50% of your contribution. (The exact amount will depend on a number of factors.)

  • ken

    I will like to discuss principles of investing and the various Thrift Funds.
    1. The longer time for your investment horizon the more risk you can assume.
    2. The greater your risk the greater your chance of making more in good years and the more you can lose in the bad years, but long investment horizons will ride the ups and down.
    3. When you are retiring put your money in the safest fun for money preservation.

    G fund: Invest in government bonds and are considered the safest investment in the world, however it grows very slow
    F fund: It is comprised of corporate, government, and mortgage back bonds. The risk is a little higher than the G fund and the return is higher.
    C fund: is large companies and medium ones. It will generally follow the ups and downs of the stock market. The risk is higher than the F fund and the return or loss will be higher.
    S fund: It is comprised of small company stocks and its risk and return will be higher than the C fund. When the stock market is going up the S fund will move higher at a faster rate. The converse is true, if the market goes down the S fund will go down faster than the stock market.
    I fund: Is international stocks with the inherent risk of fund managers picking the right countries.
    The L funds are comprised of G,F,C,I combinations. The higher the L series number the less government bonds they have, which means the risk goes up with the higher number L funds.

  • ken

    Kate I am not trying to steal your thunder. I have Finance and Accounting degrees and my only desire is to help our military families :)

    • Kate

      I appreciate your input, Ken. I tend not to discuss the individual funds because the information seems so readily available, but you and I both know that not everyone will seek out that information elsewhere. Thanks!

  • ken

    Its also a pain to discuss each fund.

    • Kate

      I know I have done it somewhere, but I can’t find it here at Paycheck Chronicles. Now I’m going to have to go look!