Free Money: Enroll in the Thrift Savings Program (TSP)

***Disclaimer: In the below article, I’ve attempted to simplify some of the confusing language used to explain the TSP in official paperwork.  As such, I do not go into full detail on some of the more intricate aspects of this retirement program and its tax treatment, so here’s a great resource if you’d like to take a full deep dive.***

What is the Thrift Savings Program (TSP)?

If you’ve ever listened to a command financial brief or listened to other service members talk about the pros and cons of the Blended Retirement System (more on that later), you’ve probably heard the term Thrift Savings Program - or TSP, more likely - thrown around.  Simply put, the TSP is “a retirement savings and investment plan for Federal employees and members of the uniformed services.” If you’ve heard friends in the civilian world talking about the 401(k) retirement plans offered by their employers, the TSP offers similar savings and tax benefits to these plans.

Unlike a pension, which is a defined benefit retirement plan, the TSP is a defined contribution retirement plan.  This means that “the retirement income you receive from your TSP account will depend on how much you [...] put into your account during your working years and the earnings accumulated over that time.”  In other words, the money you have in your account at retirement depends on two factors: 1) how much money you contribute every paycheck, and 2) the growth rate of those contributions with the magic of compound interest.

Get FREE MONEY through the TSP

Prior to the Blended Retirement System (BRS) beginning on 1 January 2018, military retirement was an all-or-nothing program.  If you finished 20 years of service, you got a pension at 50% (or more with longer service) of your high-three base pay. With the BRS, you can still get that pension at 20 years, but it’s reduced to 40%.  However, the TSP helps fix that all-or-nothing approach, giving you access to a retirement account that you can take with you if you decide to separate sometime before the 20-year mark. Ok, so where does the free money come in?  If you either choose to opt into the BRS or are a new join who is required to use the BRS, the MILITARY WILL GIVE YOU 5% OF YOUR BASE PAY, FREE!

So what’s the fine print?  Fine Print 1: you need to be in the service for at least two months to receive a free 1% of your base pay.  Fine Print 2: you need to be in the service for at least three years to receive the additional 4% of your base pay free.  Bottom line, after three years of service, if you contribute at least 5% of your base pay to your TSP account every paycheck, the government will match that 5%, dumping that extra money right into your TSP account.  So what’s this actually mean? If you’re an E-3 with three years of service, your 2019 base pay is $2,233.50 per month. So, if you contribute 5% of that pay every month ($111.68), the government will contribute an additional $111.68, for an annual total of $1,340.16!  Not bad for some free money, right?  

Automate It!

Do you have trouble saving money each paycheck?  I get it - payday rolls around, and it seems like your checking account’s empty the next day.  That’s why automating your TSP contributions is such an awesome option. Once you sign up, the money you want to contribute each month is deducted automatically, so you never even see it in your paycheck.  If you’re anything like me (and most people), this makes savings way easier.  

Tax Advantages of the TSP

As a retirement account, you’re going to get some serious tax benefits through the TSP, too.  Without going down a rabbit hole, you have two options with TSP tax treatment: a Roth TSP or a traditional one.  Here’s a great article on the detailed differences between the two, but here’s the bottom line.  If you opt to use the Roth TSP, you pay taxes on your contributions now, but you can withdraw this money and its accumulated growth at age 59 ½ and not pay any tax.  On the other hand, with a traditional TSP, you don’t pay taxes on the contributions you make now, which saves you money on your current tax bill, but you have to pay regular income tax on your withdrawals.  Here’s a good chart outlining the differences:

So which one should you pick?  Initially, I highly recommend choosing the traditional TSP option. Why? Because it's going to keep more cash in your pocket now. During Phase 1 and Phase 2 as you stabilize your financial health, two major objectives are paying down consumer debt and building a healthy emergency fund. As such, every extra dollar you keep in your pocket right now by contributing to a traditional TSP (and, therefore, minimizing your current tax bill) is another dollar you can put towards these financial goals.

As your income grows and you move into Phase 3, it'll make sense to start contributing to both. More on this later, but if you contribute to both a traditional and Roth TSP, you receive the up-front tax benefit of the former and the retirement tax benefit of the latter.  

Boost Your Savings Every Pay Raise

When you get a raise, it’s really easy to let lifestyle creep take over.  That is, you have some more money every month, so why not spend some more money every month?  FIGHT THIS URGE! Remember your original purpose for seeking financial independence and use this to stay strong with your retirement contributions.  So, here’s what I recommend: every time you get a years-in-service or promotion pay raise, add an additional percentage to what you contribute to your TSP. While the government will only match up to 5%, in 2019 you can contribute up to $19,000 total between your traditional and Roth TSPs (more if you’re in a combat zone, and this number typically increases every few years).  Using this technique means that you’ll both save much more and have a little extra disposable income each month.

What Now? Contribute 5% to Your TSP!

For BRS service members, you were automatically enrolled in the TSP when you hit 60 days of active service, with 3% of your pay automatically moved into your account.  If you don’t already have access to your TSP account, get it here. Once you can actually see your TSP account, go to your personnel office and 1) ask for instructions on how to change your TSP contributions (most service members will be able to do this on their myPay accounts), and 2) follow those instructions and make sure you’re contributing at least 5% of your base pay so you get all the free money the government is willing to give!

What Funds Should I Pick?

The final thing I’ll cover is the last choice you’ll need to make before putting your TSP savings on cruise control.  Within the TSP, you have a few different investment options - basically how aggressive (high-risk/high-return) or conservative (low-risk/low-return) you’d like your investment growth to be.  This chart gives a great overview of the different funds, but, if you’re new to investing and not familiar with a lot of the terminology, I’d recommend using the L (“lifecycle”) Funds.  These funds account for how far away from retirement you are and put together a mix of stocks and bonds that makes sense for that time range. This is an outstanding choice for new investors.

Now go get that free money!

Questions?  Thoughts? Recommendations for another topic?  Let us know in the comments!

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