Grow Your TSP

TSP – Thrift Savings Plan

As a military member you are allowed to participate in TSP. By logging in on MyPay you can make set a percentage of your paycheck as contributions to your TSP Account. These contributions can come from your Base, Bonus, Special, and Incentive Pays. However, you are not allowed to contribute any allowances you receive. The best part is, depending on the percentage you choose, and if you choose to do BRS (Blended Retirement System) it will be matched. Yearly you are only allowed to contribute up to $18,500 (unless over the age of 50, then you are allowed $6,000 more for “catch up). You do not have to worry about trying to figure out if your percentage will cause you to go over the $18,500 yearly limit because the TSP website will not allow you to put that percentage in. Therefore, it saves you a ton of time trying to do the math!

BRS – Blended Retirement System

The BRS is a new retirement system that involves TSP. By using TSP and being a part of the BRS you have the option to have your first 4% of deferrals to the TSP be matched. Even if you choose not to contribute anything, so 0%, you still receive 1% matching of your base pay. However, at first, I did that and it was not worth it. I definitely recommend maxing it out at 5% so that you receive your full matching benefits.

This gets a little confusing to people but to break it down if you contribute 1-3% of your base pay, the Government will match it. Therefore, you contribute 3% the Government will give you 3%. If you only do 2% then the Government will only do 2%. From there 4-5% are different. Instead of the Government matching it by 1%, they instead do 1/2%. This means if you contribute 4%, the Government will only match 3.5%. If you do your max of 5%, the Government will match the max of 4%.

Combat Zone Pay – TAX FREE

Let’s keep this simple. While in a combat zone 100% of your pay is TAX FREE. You still have to pay social security and Medicare but that is it. When in a combat zone and contributing to a TSP you want to make sure you either are, or switch over, to ROTH TSP. You will want to do this because your pay is tax free. If you leave it as Traditional TSP and contribute while in a combat zone you end up later having to pay tax on the funds you earned and out away while in a combat zone. By switching to ROTH while in a combat zone it allows your funds to be tax free still.

Traditional vs Roth

This mainly has to do with tax. If you choose to use traditional your funds are tax deferred and will grow until you with draw your money. Once you withdraw it then you will pay taxes on it. This happens because if you contribute say $7,000 of your pay, which yearly is $60,000, then you only pay taxes on $53,000 for the year as if you only made that amount. Also, as a side note withdrawing from the TSP account counts as provisional income at 100% for SSI tax.

Roth is of course different. Mainly in only one way. You are still taxed. If you contribute $7,000 of your $60,000 pay you are still taxed on your full income of $60,000. However, keep in mind than the $7,000 you contributed will be tax free growth until withdrawn, instead of tax deferred. Once these funds are withdrawn, they will be income tax free.

TSP Investment Options

These are the different funds:

The G Fund – Government Security Investment

a special investment offering where you essentially earn longer-term rates of fixed-income, government bond returns with only short-term investment risk. This unusual offering is unique to the TSP and represents a very compelling fixed-income holding for a portfolio.
Pros: No volatility and backed by full faith and credit of the U.S. government
Cons: Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low

The F Fund – Fixed Income Investment

a general bond fund index made up of a broad array of fixed-income securities.
Pros: Low volatility; historically outperforms G fund
Cons: Currently has low returns as based on prevailing interest rate; loses value if interest rates rise sharply

The C Fund – Common Stock

replicates the S&P 500 Index – a group of 500 of the largest companies in the United States. This is the most common benchmark against which other equity investments are measured.
Pros: Historically has returned around 7-9% over the long term, depending on who you ask, and how you calculate.
Cons: Can have decade long periods without gains; falls with crashes and bubbles

The S Fund – Small Capitalization Stock

represents the relatively smaller capitalization companies in the United States.
Pros: Similar returns to the C fund, but with more diversification
Cons: Can have decade long periods without gains; falls with crashes and bubbles

The I Fund – International Stock and Investments

replicates an Index of Foreign Companies.
Pros: Allows for international equities to be purchased
Cons: Only invested in developed countries, so lacks exposure to entire international market and emerging markets

Lifecycle Funds

Pros: Asset allocation and re-balancing is done for you by BlackRock, which is one of the most respected investment firms in the world with $6.3 trillion under management.
Cons: You have no control over your asset allocation; some say the fund is conservative

TSP Loan

You can get a Loan from TSP for up to $50,000 or 50% of your TSP balance. I highly do not recommend it though.

Withdrawal

You can withdraw your money when in a hardship. This will count as a “Hardship Withdrawal” but there are many rules around these types of withdrawals.

Once retired or your time with the military comes to an end you do have several options as to how you can withdraw your money.

These are your options:

Move assets to either an IRA or to a subsequent employer’s 401(k) Plan, assuming the new plan accepts transfers – not all do.
Receive a single Lump Sum Payment of your full account balance
Receive a Series of Equal Monthly Payments
Receive a specific monthly dollar amount until all your funds are exhausted
Receive payments based on your IRS Life Expectancy
Full Withdrawal as Life Annuity
A combination of the above options

If you withdraw before the age of 60 you will have a penalty of 10% that you will pay. The best thing to do is let it sit there until you come of age if you can.

Allocation Strategy Ideas:

80% C | 10% S | 10% L

60% C | 20% S | 20% L

18% G | 42% F | 20% C | 10% S | 10% L

12% G | 28% F | 30% C | 5% S | 5% L

50% C | 25% S | 25% L

50% S |50 % C

*Do not continue to switch back and forth between allocation options because you keep seeing something that may be better. By doing that you can harm your investment, instead, just wait it out. Keep in mind TSP is made for long term not short term! *

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