Military members have been able to contribute to the TSP for years, but recently many of them are questioning if the accounts are really the best way to save for retirement. While these accounts are the same ones used by federal government employees (including members of Congress) to save for their retirement, they have been criticized for having high fees and being difficult to understand. On the other hand, the accounts have been praised for their variety of choices and their accessibility to everyone.
The TSP essentially functions as a 401(k) plan for government workers. While civilian employees get a 5% match to their contributions to these accounts, military members do not because they can qualify for a pension. Because there is no match, the advantages to a military member to use these accounts are the tax benefits, fee structure, and the investment choices. The real question is whether these attributes actually benefit a military member, or can he or she find better deals somewhere else?
The tax benefits of the TSP are one of the first advantages that many financial experts cite when touting the benefits of the TSP. Every dollar saved in the accounts is not taxed, nor are any profits that the account makes from investments. Only when it comes time to withdraw the money is it taxed. If a military member is in a combat zone (so his or her income is not being taxed anyway), then the withdrawal of the money is not taxable.
The fact that this money is not taxed, however, means that these investments are often touted as having a guaranteed return. A person who typically pays a 15% tax rate, for example, would be assumed to get a 15% return on any money that he or she invested in the TSP. This makes these accounts an excellent choice for a single colonel with few deductions, because of his or her high tax bracket. An airman with several children, however, likely pays no income tax because of the high number of deductions he or she can take. This would essentially negate this advantage of the TSP. All money that is deposited into these accounts in a combat zone, however, is not taxed when it enters or leaves the account. For this reason, many people in the lower ranks choose to only invest when they are deployed.
There has been a lot of talk about the fee structure of these accounts. While the fees paid to management firms for these accounts were previously hard to determine, a new law now requires every business to disclose their retirement plan fees. Surprisingly, the fees on the TSP account were relatively low compared with similar retirement plans. In fact, fees range from 0.6% to 0.75% of the total account value per year. The average fees for most American 401(k)s are around 1.25%. Financial experts generally consider accounts with fees less than 1% to be low cost.
Staff Sgt. Gregory George speaks to Senior Airman Ryan Brooks at Shaw Air Force Base. Finance personnel are available for questions about Thrift Saving Plan and the new Roth program.
Finally, a service member who is considering investing in the TSP should look at the investment options it offers. In general, there are six different funds to choose from, including three stock choices, corporate bonds, government bonds and cash, and a recently added fund that provides a mix of these other funds based upon a person’s expected retirement year. For many beginning investors, these options are a good start to building a portfolio.
Stocks, bonds, and cash make up the basis for most individual retirement accounts. It should be noted, however, that there are no “exotic” or unusual investments in these accounts. In other words there is no real estate, REIs, commodities, or artwork. For very sophisticated investors, this lack of options can be an issue. For this reason, many older investors choose to place only a portion of their overall retirement savings into the TSP, and make other investments on their own.
More info: https://www.tsp.gov/