4 Reasons Why a Military TSP is a Good Investment

Saving for your retirement is almost always the right thing to do. Most folks are familiar with their 401(k) through their private employer, but military personnel have a different, possibly even better option. Military personnel have the ability to save and invest in a Thrift Savings Plan, or TSP for short. 

A TSP functions very similarly to a 401(k) but has a few added benefits you could take advantage of too. In this article, we are going to tell you all you need to know about why a military TSP is a good investment. 

TSP Accounts Have Diverse Investment Options

You can personalize your TSP by choosing exactly which of the available funds you want to invest in. Depending on your age and income level, each fund offers different benefits and risks. There are five main funds you can choose to invest in, or you can choose a “lifecycle” fund that will adjust and invest in the best funds for you. 

Here are the five main fund options and who they may be best suited for. 

• The G Fund: The G fund invests in government securities and is the all around safest fund. You are effectively guaranteed not to lose money, but the rate of return is also the smallest of all the funds. This is the place to keep your money if you are older and stability is the most important thing. 

• The F Fund: The F fund invests in U.S. government mortgage-backed, corporate, and foreign bonds. Bonds are lower risk investments than stocks, but the rate of return is also considerably smaller. On the flip side, when stocks go down, bonds go up. This is also a good choice for older folks valuing stability and minimizing risk. 

• The C Fund: The C fund invests in stocks, specifically stocks that are tracked on the S&P 500 Index. The index is a mix of medium to large U.S companies. This is a higher risk than the G and F funds, but is the lowest risk of the possible stock investing funds. The C fund is a good place to be for someone in their mid career who is looking to manage risks, while also seeing some modest returns.

• The S Fund: The S fund also invests in stocks, but not members of the S&P 500. This fund invests in smaller, higher risk stocks. These are lesser known companies and startups that have great potential for big returns, but also carry the strong possibility of failure. Investing in the S fund is ideal for younger folks who could withstand some losses, and still have plenty of time in their careers to make up the difference. 

• The I Fund: This is the fifth and most risky of the funds you could choose from. Your savings are invested in international stocks which pose the highest risk, but also the greatest possible returns. This will be the most volatile and is best suited for younger folks who can stand to weather the rise and fall over longer periods of time. 

The Lifecycle Funds

If you read over the options above and found yourself to be stressed out at the myriad of possibilities, then rest easy. For folks who don’t feel called to tracking the ups and downs of the stock market, there are the lifecycle funds, or L funds. These are the perfect option for someone who wants to make the most out of their money, while also trusting someone else to do that. 

The L funds are managed fund options where financial experts invest and shift your money around the different funds based on your age and prospective retirement status. So if you are young and many years from retirement, the L fund will put you on a riskier, higher yield pathway. Then they will automatically adjust and reinvest as you move closer towards retirement. 

There are several different L funds that are each recommended based on the year you were born and the years when you intend to start withdrawing money from your TSP. The funds are spaced in five year increments from 2025 to 2065. The current L fund options are as follows. 

For added safety, the L funds rebalance investments every three months. This will keep you at the top of your game no matter where you are on your journey to retirement.

The Government Matching on Contributions Is Great

If you are familiar with a 401(k) through a private employer, then you know that the employer will often match your contributions up to a certain amount. Well the government will similarly match contributions to TSP plans up to 5% of your basic pay. Let’s break down how this turns out to be a great asset for you. 

In 2018, the military made some major changes to the retirement system. They introduced the current system which is called “The Blended Retirement System,” or BRS. The BRS combined the existing pension benefits for service members who served twenty years, but reduced the percentage contribution slightly.

To compensate for the reduced pension contribution, the service members are now automatically enrolled in a TSP plan, and the government will automatically match 1% of your base pay regardless of your contributions. So you could put nothing into this account, and the government will still contribute 1% of your base pay regularly. 

But that’s the bare minimum. The government will match your contributions all the way up to 5% of your base pay. So if you set up your TSP to contribute at least 5% of your base pay, then you will also see that amount contributed from the government. However, if you contribute more than 5%, the government will still only contribute 5% of your base pay. 

This 5% matching is only available after two years of service. You can head over here to get a projection of how much you could end up saving total. Just enter some quick basic information about years of service, pay, and when you intend to withdraw and you’ll see big results. You’ll quickly see how ten of thousands can become millions over a few decades of compounding. 

Because of the nature of this system, it basically doesn’t pay to contribute less than 5% of your base pay. If you do contribute less than 5%, you are leaving free money and contributions on the table from the government. There are limits as to just how much you can contribute annually that change over time, but contributing any less than 5% is wasting money. 

TSPs Charge Smaller Management Fees

Any investment account is bound to have some sort of fee attached. Usually there is an annual percentage charged based on the amount of money you have invested. This charge goes to pay for the administrative and investment expenses. 401(k)s often see these investment charges somewhere around 1%, which can start to add up after you’ve invested tens of thousands. 

TSPs on the other hand have some of the lowest management and investment fees we’ve ever seen. Recent data shows the fees ranging between 0.049% and 0.068% depending on which fund you are invested into. That is astronomically lower than some of the traditional 401(k)s out there. 

Here is an example of how that percentage works in real numbers. Let’s say you have $1,000 invested in an F fund where the net fee is 0.060%. This means you would pay an annual fee of just 60 cents. Folks with larger investments in the fund will pay a larger sum on the fee, but still an equal percentage. 

Someone invested in that same F fund with a total of $100,000 in it would still only pay $60 in annual fees. That percentage just can’t be beat. And the 0.060% is one of the higher ones we’ve seen. Depending on which fund you have invested in, it is possible and likely that your annual fee will be even less. 

You Can Save Lots In Taxes Now and Later

There are two things in life that are guaranteed, death and taxes. But, if you play your cards right, you could manage to catch some serious tax benefits with your TSP account as well. The first thing to know about your TSP and taxes is that there are actually two different TSP options available. A traditional pre-tax TSP and a Roth, or post-tax, TSP.

You get to choose whether you would like your contributions to be tax-deferred or not. If you choose to defer the taxes now, then those contributions will be taken off your W-2 and won’t appear as taxable income. However, you will then pay taxes on the withdrawals you eventually make from the account as if it is income.

On the flip side, you could choose to pay the taxes now in a “Roth” TSP, so that in the future when you withdraw, the funds and the interest are completely tax free. The immediate tax break is enticing, especially for financially strapped young folks just getting started. But many financial experts agree that the Roth TSP is a better choice.

Why Is The Roth TSP a Better Choice?

Nobody can predict the future. However, if you imagine a future where you graduated to a higher tax bracket or taxes generally increase, then paying taxes now and creating a tax free retirement income would definitely benefit you. Lower income earners, like most folks just getting started, generally pay less in taxes. So you’ll pay less comparatively if you pay them now.

It can be tough to imagine decades into the future, but think of your TSP like your planned income for retirement, and each withdrawal is a paycheck. If you choose to pay the taxes on your contributions now, then that income will flow completely tax free. But if you defer the taxes now, then your future withdrawals will be taxed based on your future income.

There is one more way to sweeten contributions to your Roth TSP. Many combat zone contributions can be placed into the TSP completely tax free. Additionally, depending on where you are, you may be able to bump up your annual contributions beyond the limit all the way up to $50,000. Contributing more while in combat zones is a smart way to maximize your earnings. 

Should I Max Out My TSP?

When you are just getting started with saving for retirement, it can be pretty tough to commit to bigger investments early on. Those long term goals are harder to hold on to, and the appeal of having more money available now is very strong. But it could benefit you enormously to max out your TSP contributions early on thanks to compound interest.

Compound interest is interest earned on top of the interest you have already earned. Basically the more you invest early on, the greater your early returns and interest will be, thus making the compound interest even larger. Maxing out your TSP is an amazing way to seize the benefits of this compound interest, assuming you’ve managed your debts accordingly.

The government sets a maximum annual contribution limit. The limit in 2021 is $19,500. This amounts to exactly $750 per pay period. Many financial experts will encourage you to set up your contributions as a percentage instead of a specific dollar amount, but if you want to contribute the exact max, then $750 per pay period is the way to go. 

The max contribution does not include the government’s 5% matching contributions. This means that your annual contribution will be your own personal $19,500 plus the government’s additional 5% of your base pay, rounding out your annual deposits to approximately $58,000, depending on your base pay. 

The federal contribution limit is raised if you are over the age of 50. This is considered a “make up” contribution, and you are allowed to contribute an additional $6,500 annually for a total of $26,000. 

Obstacles To Maxing Out Your TSP

Now maxing out your annual contributions is awesome, and you may be able to retire considerably earlier than you planned. But that is all predicated on the idea that you will be in the position to max out your TSP early in your career. Life is messy, and there are often obstacles standing in the way of giving the max contribution for the future. 

• Childcare is one obvious and enormous expense. The average annual cost of raising a child is $12,980. And that is just for one child! It’s plain to see how children will impact your ability to contribute to your retirement fund.

• Credit Card Debt is another major obstacle to saving. Most financial experts advise you to pay off and manage all your credit card debt before you start to save for retirement. Depending on your background, this can seem like an impossible goal that is always running away from you. 

• Higher education costs can also stand in the way of retirement savings. Often higher education is a necessary component to reaching a higher level of pay. You may be in a position for the military to pay for that advanced degree though!

Overcoming those obstacles and any other roadblocks may be tough at first. But with diligence and planning you can confidently reach those max contributions. Depending on the type of lifestyle you lead, you may position yourself for an early retirement and coast on the earnings of your TSP though late adulthood. 

Contribute To Your TSP On Deployment

Contributing higher amounts while deployed is another awesome way to maximize your TSP earnings potential. You should contribute to the Roth TSP while on deployment because then that money will be completely tax free. Military pay in a combat zone is completely tax exempt, and contribution limits are raised while you are in a combat zone. 

The DoD and IRS work with Congress to define what constitutes a combat zone, and fortunately it is a little broader than you may expect. “The term ‘combat zone(s)’ is a general term used on IRS.gov and includes all of the following hostile areas where military may serve: actual combat areas, direct combat support areas, and contingency operations areas.”

So even if you are not actively engaged in a firefight, you may still fall under the category of combat zones, and therefore be eligible for larger tax free contributions to your TSP. That being said, we aren’t suggesting you volunteer for active combat just to receive these financial incentives. 

Obviously deployment was on the table when you enlisted, and it is in fact what you signed up for, but that doesn’t mean you have to rush off into combat just so you can maximize your contributions. Be smart and take advantage of the opportunity when it is presented, but don’t force yourself into an unsafe situation just for the money. 

Frequent Questions About the Military TSP

Finance folks may feel extremely comfortable navigating the intricacies surrounding a military TSP. However, if you consider yourself to be in the general population that struggles with the finer details, then you may have some questions. Let’s take a look at some frequently asked questions surrounding military TSPs.

What Happens to TSP When You Leave the Military?

While some people out there may be in the military in some way for their whole life, the majority of service members will leave at some point. So what happens to your contributions to your TSP when you leave?

You can keep your money in your TSP account after leaving the military assuming your account balance is greater than $200. You will no longer be able to make contributions, but the amount you have already contributed can continue to earn interest with all the benefits of the TSP. 

There are a few important steps to take when leaving the military and maintaining the TSP. The most important thing is to keep your current address up to date. You can update this information through the MyPay website.

How Do I Cash Out My Military TSP?

If you’ve left the military and are no longer contributing to your TSP, you may be interested in withdrawing funds from the account. You can also let it rest and earn more interest for years and years. You have a few different options when cashing out your military TSP.

Your cash options include a partial withdrawal, a lump sum payment, monthly payments, or life annuity purchase. Once you’ve left the military, you can choose any of these options or any combination of them. 

Can I Cash Out My Military TSP Before Retirement?

The Thrift Savings Plan is in fact a retirement plan so withdrawals prior to retirement are restricted. That being said, there are very specific circumstances under which you could make a withdrawal from your TSP before retirement. 

You can take out loans or hardship withdrawals before your retirement from the military. Loans are available to members are still “in pay” status, allowing you to borrow from your contributions for a small processing fee. You’ll pay back the loan, with interest, through payroll deductions. 

The military does consider withdrawals while still in service. These are strictly limited to what is called a hardship withdrawal, and are considered under specific circumstances. Hardship withdrawals should be considered seriously and only taken if you absolutely need to. 

What Are The Rules of the Military TSP Hardship Withdrawal?

A hardship withdrawal can be a lifesaver, but it isn’t without consequences. There are a few specific circumstances that must be met in order to proceed with a hardship withdrawal. 

To be eligible for a hardship withdrawal you must meet one of the following four conditions. You can document negative cash flow using Form TSP-76, have medical expenses, experience personal casualty losses, or have legal expenses for separation or divorce. 

Assuming you meet one of those four conditions, there are some other things to note. The withdrawal amount must be greater than $1,000, and it cannot be put back into the TSP. You will also be frozen out from contributing to your TSP for six months. 

You will also be subject to taxes and penalties. The withdrawal will face federal and state income tax. If you are under the age of 591/2 then you will be required to pay an additional 10% early withdrawal penalty. Life happens and this could be your saving grace, but be sure to consider all the repercussions before submitting that request for a hardship withdrawal. 

Is the Military TSP a Good Investment?

Research indicates that the military TSP is an all around great investment. There are lower management fees than practically any other private investing account you may be associated with. The diversity of options is appealing to anyone regardless of income and age. The contribution matching benefits are excellent, and the tax maneuverability is superb.

With the government’s recent changes to military retirement and the creation of the blended retirement system, you will already be enrolled and receive some matching into this account. It only benefits you to do a little bit of work and really maximize the earnings on this account. 

Contributing large sums early on, and taking advantage of the various tax benefit options are fantastic ways to maximize your earnings and retire early. So set those sights on a comfortable beach in Florida before age 60. With the proper investment and dedication, you’ll be lounging all the way into early retirement and then some.