How to manage your Thrift Savings Plan.
For a military member, contributing to the Thrift Savings Plan (TSP) is one of the 3 legs of retirement planning as a part of the Blended Retirement system. This leg is a very valuable part of your retirement. The following tips will help you to manage your TSP ensuring you receive the most benefit possible.
- Review your Thrift Savings Plan contributions.
The Thrift Savings Plan allows participants to contribute up to $19,500 a year or $26,000 for those 50 yrs old and older. You don’t have to contribute the maximum to make a big difference, the following key strategies provide the most bang for your buck.
- Contribute enough to get the match.
Military members get an automatic match of their contributions to the TSP up to 5% of their salary. If you contribute 5% of your salary the military will contribute a matching amount to your TSP account. Even if you decide not to contribute at all the service will contribute 1% of your salary no matter what. See the chart below for how the matching amounts work:
TSP matching contributions chart.
- Special pay and bonuses.
Military members can make contributions from their special pay and bonuses. The military will not match any of that amount. A member may elect to contribute from 10% to 100 % of special pay and bonuses, this includes reenlistment bonuses, hazard duty pay, and career incentive pay. Adding even small amounts from your special pays and bonuses can end up making a huge difference in your overall TSP amount.
- The Roth or Traditional Thrift Savings Plan?
By default, members are placed in the traditional TSP. The contributions to the traditional TSP are made pre-tax. Meaning they provide an immediate tax break in the year they are contributed. They are then taxed as income in retirement when withdrawn. The contributions to the Roth TSP are made post tax. Meaning that the income is taxed before the contribution is made to the Roth account, therefore they do not provide a tax benefit in the year of contribution but are not taxed when withdrawn while in retirement.
- Diversify your overall investment portfolio, not the investment accounts within it.
Asset allocation applies to your portfolio as a whole and is a balanced approach of stocks, bonds and other investment. The important thing to remember is that it applies to your portfolio as a whole and not to just certain accounts within your overall portfolio. You should think of your investment portfolio as a team, where everybody or investment is working towards one goal, your retirement. You would want everyone on your team in a similar jersey, knowing similar plays, terms and strategies. As your team would have a common vision so should your overall investment portfolio.
- Keep it in or roll it out?
Once you have left government service it may make sense to roll your traditional TSP out to another retirement plan such as a Roth IRA. The Roth conversion may allow you to take advantage of tax deferral, basically meaning that you get a tax break while your income tax rate is high, such as when you are working then pay income tax when your rate is lower such as during early retirement. A further consideration is that a Traditional TSP will have required minimum distributions once you reach age 72. This means that you have to start to take funds out of the traditional TSP, and this forced income may negatively affect your overall tax and financial situation, for instance if the required amount is too much it may push you into an income range where additional medicare insurance premiums are required.
Managing your Thrift Savings Plan is an essential portion to successfully planning your retirement benefits.