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Thrift Savings Plan – A Great Retirement Vehicle

by Ryan Guina

The Thrift Savings Plan, or TSP, is a tax deferred employer sponsored retirement plan for certain civil service employees and US military members. If has very similar rules as a 401k plan or 403b plan, including the same contribution limits, withdrawal rules, rollover rules, and more.

Benefits of Investing in the Thrift Savings Plan

In general, most civil service and military servicemembers are eligible to invest in the TSP. Enrollment is now automatic for most members, otherwise, it’s as simple as taking five minutes to sign up through your HR department or by visiting the TSP website. Most civil service members receive an automatic matching contribution, and there is nothing members need to do to start the initial match, though they will need to make their own contributions to max out the agency match. Here are some additional benefits to investing in the TSP:

benefits thrift savings plan

The benefits of the TSP are numerous

Solid investment choices. The Thrift Savings Plan is comprised of five basic index funds and a handful of LifeCycle Funds (target date retirement funds), which make it easy for even the beginner investor. There index funds mirror popular stock indexes and bond funds.

The stocks indexes cover some of the fundamental sectors of the market, including Large Cap stocks (mirrors the S&P 500 index), Small Cap stocks, (reflects the Dow Jones Wilshire 4500 index), and International Stocks (Morgan Stanley International EAFE Stock Index). The bonds cover government bonds (generally the most stable), andfixed securities, which aren’t guaranteed like government bonds, but which often have a greater return on investment.

The TSP also uses target date funds for those who want to invest with a less hands on approach. The target date funds, called LifeCycle Funds, are comprised of a mixture of the above stocks and bonds and are automatically allocated by your target retirement date, adding more fixed income investments to the mix the closer you get to retirement.

Very low expense ratios. The Thrift Savings Plan has some of the lowest expense ratios I’ve ever seen for any form of index fund – often even lower than companies such as Vanguard and Fidelity. The highest management fee is currently .05%, which includes the LifeCycle Fund investments (most mutual fund houses charge much more than this for a target date fund investment).

Tax free withdrawals are possible in retirement. (Yes, it’s true!). The TSP recently added a Roth TSP option, but it was even possible to receive tax free withdrawals before the Roth option was available. Military service members who contribute to the TSP while deployed are able to make contributions with tax exempt income. Since Traditional TSP contributions are made with pre-tax money, the TSP tracks these tax-exempt contributions and members can with draw them on a prorated basis with their regular TSP withdrawals. It’s important to note that only the contribution is eligible to be withdrawn tax free, as it isn’t possible to track the earnings from that contribution. Tax exempt contributions are tracked on your TSP balance sheet – look for a line which states “Tax Exempt Balance – $xx,xxx.xx.”

Invest your bonuses and special pays. Military members have the option to invest all or a portion of their bonuses and special duty pay to their TSP, up to the annual contribution limit. Eligible pay and bonuses include things such as your special duty pay, retention bonuses, Hostile Fire Pay, hazardous Duty Pay, and some other bonuses.

Civil service members are eligible for matching contributions. Civil service members automatically receive a contribution to the TSP when they join the civil service, but they can also earn more money by making larger contributions, which the civil service will match – up to 5% of their salary (up to the contribution limits). There isn’t a match for the military. The military services are allowed to offer a match, but it would have to come out of personnel funds, which are limited. The Army has offered a match on a limited basis as a retention bonus, but it is not widely available.

The Thrift Savings Plan is a solid investment plan for civil service members and military members, and is a great way to invest in a low cost, tax deferred retirement plan.

For reasons I believe the TSP has some drawbacks read this article: TSP – 5 Drawbacks.

Photo credit: thinkpanama


Published or updated October 23, 2012.
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1 Brandon J

I cover the TSP extensively in my Money for Military finance blog. I think the TSP is great; however, I think you should max out your 401(k) first then contribute to the TSP. The TSP is only available while you are in the military or civil-service. You have to roll it into an IRA anyways. There are ways to play the TSP to make it more risky and to enhance returns too. I will wait and see what you write about the drawback though.

2 Ryan

Hi Brandon,
Do you mean max out your IRA first? Because there is no TSP match for military members, it does make sense to max out your IRA before contributing to your TSP (especially if contributing to a Roth IRA).

And while you can only contribute to the TSP while you are currently in the employ of the govt., you are not required to roll it over into another 401k plan or into a traditional IRA when you leave. I am no longer in the military, but I have some money that I am leaving in the TSP because I have a tax exempt balance and I am not sure if that would roll over and maintain it’s tax exempt qualities.

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