TSP: Love it

TSP (Thrift Savings Plan) is the tax-advantaged retirement savings and investment vehicle available to federal employees and members of the military.   TSP has evolved over the last several years to become something very different than the original program that received its first contributions back in 1987 and has now become the largest defined contribution plan in the world.

So, what’s the word about TSP?

• ROTH.  In 2012, TSP added the option for participants to make Roth contributions.  As a financial counselor with the military for the past several years, I am still stunned by the question, “should I contribute to my Roth IRA or to the TSP?”  The better question is:  “can I work toward maxing out my Roth TSP option ($19,000 for 2019) AND THEN max out my Roth IRA ($6,000 for 2019)?”

And why would you chose to use TSP as your saving vehicle before an IRA?

• FREE money.  Both federal employees and all newly signed service members or those who have “opted in” to the new military retirement system (BRS) can receive a matching contribution to their TSP account.  You can make your contribution to either your Roth (after-tax) or Traditional (pre-tax) balance, and then receive up to 5% more from your employer (the government) toward your Traditional balance.  If you are making $50,000/yr, that means you contribute $2,500 per year (your 5%) and the free money to you is another $2,500 per year (courtesy of your employer).  No IRA offers this kind of 100% return on your money as soon as you invest.

But what about withdrawing your money, I hear that TSP is not a good investment plan once you leave your federal job or military service?

• NEW flexible withdrawal options!  In the past, you could only go “two times to the well” when it came to your TSP account, meaning you could do one partial withdrawal of your money after you separated from service but the second time you had to either be old enough to start taking regular distributions (age 59 1/2) or you had to rollover the remaining balance to an IRA.  Further complicating your options was that you could not distinguish between pre-tax (Traditional) and after-tax (Roth) balances; it was distributed proportionally based on the total balance in your TSP account.  Today TSP withdrawals look much more like the options you have with most IRAs:  take multiple withdrawals both during service and after service, distinguish which type of distribution (either Traditional or Roth money), and the ability to roll other retirement funds into your Traditional or Roth balances for ease of management.  Read the details here.
• Online management of your account.  Your federal or military service may end but your ability to access and manage your money in TSP does not.  The TSP website is more automated and user-friendly than ever.  The Thriftline gets you quickly through to a more knowledgeable “real” person.  Statements and other needed documents are readily available for download, and interactive planning tools take some of the guesswork out of retirement income planning.  In a nutshell, www.tsp.gov offers what you would expect from any of the best investment companies in the business.

Here are some reminders about the other “good stuff” that TSP offers:

1. Asset Allocation:  TSP offers all the basic funds you need to be properly diversified no matter what stage of life you may be in.  The Lifecycle Funds take a mix of the basic funds added to the timeframe when you plan to use your retirement money and makes the fund choices and adjustments for you.  See more about each fund here.
2. Very low expense ratios:  TSP charges 0.033% to manage your money.  Other similar index mutual funds average 0.2%, which is still low but is six times more than TSP.  That adds up to more money for you in retirement.
3. The G Fund:  this a special investment option created by the federal government and available only in the TSP.  The objective of the fund is to preserve principal with a secondary goal of beating inflation.  You cannot lose money in the G Fund and most years they do manage to beat inflation.  While this is a lousy parking place for your money when you are young and growing your assets (that’s a whole different blog post), it is a beautiful option for those who are well into their golden years and want to protect their nest egg with very little risk or expense.
4. Professional management:  TSP is managed by the well-respected BlackRock Institutional Trust Company, the world’s largest asset manager.
5. Easy to use:  all you need to do is sign in to your MyPay website to indicate what % of your pay you want to contribute and what kind of tax treatment you want (Traditional or Roth).  They take it all from there — the beautiful ease of using an employer sponsored plan!