The TSP is a defined contribution plan for US Civil Service employees and members of the uniformed services. It is administered by the Federal Retirement Thrift Investment board. Military members are permitted to make contributions from their basic pay, special pay or bonus pay but are subject to the annual limit of $19,000 in 2019. If contributions are made while in a combat zone then the service member is not subject to the $19,000 limit. The funds contributed by service members are allowed to be matched by the service but that is up to the direction of their respective service secretary. The new retirement system includes matching TSP contributions the subject of which will be covered in another post. Since the funds are contributed by the service member those funds are fully vested and may be withdrawn at any time. A penalty may be assessed by the IRS depending on the particular situations those funds are withdrawn.
The TSP offers 10 funds to invest in. Five of the funds are lifecycle funds and the other five are individual funds. Service members may choose any or all of the investment choices to invest in. The individual funds are low cost funds following a comparable index while lifecycle funds change their respective investment allocation based on the service member choice of date to begin retirement withdrawals. The individual funds are as follows;
- I-Fund=International Stock Index. Invests in international stocks. Tracks the MSCI EAFE index.
The 5 lifecycle funds and their explanations follows;
- L-Fund=Lifetime Income fund. This fund is conservative and maintains principle while earning income. It is what a lifecycle fund turns into following their expiration.
- L-2020=Fund designate for personnel retiring from 2017 thru 2024.
- L-2030=Fund designated for personnel retiring from 2025 to 2034.
- L-2040=Fund designated for personnel retiring from 2035 to 2044.
- L-2050=Fund designated for personnel retiring later than 2045.
While these accounts are designed to fund your long term retirement funding you can withdrawal funds from them, and in some cases avoid penalties. You can take a loan from your account for an amount equal to half the value up to $50,000. This loan is payable in terms from 1 year to 5 years, if the loan is for a home purchase an extended repayment term of up to 15 years is possible. The monthly payment for these loans must come from your military pay so you cannot take these loans if you are out of service or retired. If you separate from service and have a loan in repayment you must pay the loan back within 90 days or pay IRS penalties. You can always take the funds out of the account but will have to pay taxes on the amount withdrawn, IRS penalties and lose the ability to ever redeposit those funds back into the account.
Separating from Service.
As you leave the service a common question is what do I have to do with my TSP if anything? The answer is you can leave the TSP where it is. The TSP is an excellent, low cost, proven retirement account. You will not be able to add to it after retirement but the account can continue to grow over the years. A lot of financial service companies will try to convince you to transfer the TSP to their accounts. This rollover should be considered very carefully. The low cost of the TSP is the main feature. It has been proven over and over in financial studies that low cost is one of the largest determinants of success. The financial service companies will want you to roll your TSP balance to their accounts so that they can earn commissions and fees, which are not charged in a TSP account. If you are considering this move take a close look at the fees and charges involved.
The TSP is a fantastic retirement savings vehicle. It has numerous advantages and has continually been viewed by financial professionals as the gold standard for retirement plans. Being careful about how you manage your account will go a long way to your retirement being successful and bountiful. If however you do not manage your TSP and squander it that could set the conditions to a retirement full of scrimping, saving and regrets.