MCENTIRE JOINT NATIONAL GUARD BASE, S.C. -- Hello Swamp Foxes and welcome to October Drill! Past Shirt Blasts have covered a range of benefit related topics including the point system, retirement, and education. This drill I wanted to continue that trend by discussing the Thrift Savings Plan. Before we go any further, a disclaimer:
*Disclaimer: I AM NOT ADVOCATING FOR ANY PROGRAM. This article should not be the only source regarding this topic. If you have questions, consult a credible professional and consider all options. Always be leery of self-proclaimed "experts", everything on the internet is not true, and verify your sources.
THRIFT SAVINGS PLAN BASICS:
To start, it helps to know the background and reasoning for why the TSP came to be. The TSP started as a savings plan for civil service employees in 1986 in response to 401ks. It only recently (relatively speaking) became available to the military in 2001. It offers the same savings and tax benefits as a 401k. Like a 401k, it is a defined contribution plan, meaning the amount you get out is based on the amount you put in. The younger you start, the better off you'll be. That said, it's never to later to start.
The TSP is required to be managed, by law, prudently and solely in the interest of their participants and beneficiaries. The money is held in trust by the Federal Retirement Thrift Investment Board and managed by 5 presidentially appointed board members as well as one executive director.
How It Works:
TSP is available to both military and federal civil servants. There are slight variations between the two so for the purposes of this article, the focus will be from the military perspective. To contribute to the TSP, go to mypay>Traditional TSP and Roth TSP. Once you've selected the type of TSP you want to contribute to, decide a percentage of pay you want to contribute as well as the type of pay you want to contributed (basic, special, incentive, or bonuses). You can change your percentages or stop TSP at any time through mypay. All funds will automatically go into the G-fund unless you go into your TSP account and change you allocations. Funds will be discussed in a future article, so keep an eye out!
Traditional Vs. Roth:
The real difference between the types of TSPs is whether you want to pay taxes now or later.
Traditional: When you contribute to traditional, you are contributing pre-tax dollars; meaning it comes out before it is calculated as income for tax purposes. However, when you draw from your TSP following retirement the entire amount is taxed at your tax rate at the time of withdrawal. The entire amount will be counted as income for tax purposes when withdrawn. This is known as tax deferred.
Roth: Roth is post or after tax dollars, meaning you are putting in your disposable income into the account. The advantage is that when you withdraw the money following retirement, you do not have to pay taxes on either the principal or interest.
Here are the mechanics of it. If your tax rates at the time of investment and at the time of withdrawal were identical, the amount paid in taxes would also be identical. Go ahead and test it by using the same tax rate for your current and retirement rates then look at the annual income in this TSP calculator. Why offer different types? Well, it's highly unlikely that your tax rates will be the same throughout your earning years and into retirement. This means the primary consideration when determining between Roth and Traditional is the tax at the time of contribution versus your expected tax bracket at withdrawal. Usually, we tend to be in our lowest tax bracket in our younger years and in our highest tax bracket just before retirement then somewhere in-between post retirement. Obviously this can change depending on tax code changes. The conventional logic is to contribute to the Roth option in your early career stages and eventually switch to contributing to the Traditional option as your wages and earnings grow. However, that is a very general perspective; you have to look at your situation. Career changes, going from two working adults to one working adult (and vice versa), life changes, etc. could all change your investing strategy. There is no shortage of calculators out there to help figure your best way ahead, but I would always recommend discussing with a professional.
Next month we'll touch on some of the different funds that are available. I hope this has been helpful; please feel free to discuss this topic with your peers, supervisors, and subordinates; you never know who it could help. Thanks for your time and all you do!
REFERENCES:
TSP History
Everything you want to know about TSP
Traditional versus Roth