There’s a staggering amount of misinformation surrounding military retirement plans, especially the Thrift Savings Plan (TSP). This can lead to costly mistakes for veterans. Are you sure you’re getting the most out of your TSP?
Key Takeaways
- Your TSP contributions are made pre-tax, but you can convert existing balances to a Roth TSP for tax-free growth and withdrawals in retirement.
- You have multiple withdrawal options upon separation from service, including a full withdrawal, partial withdrawals, or monthly payments, allowing you to tailor your withdrawals to your financial needs.
- The TSP offers a variety of investment funds, including lifecycle funds that automatically adjust your asset allocation over time, so choose a fund that aligns with your risk tolerance and retirement goals.
- Unlike some civilian 401(k) plans, the TSP has very low administrative fees, so take advantage of this cost-effective retirement savings option.
## Myth 1: I can’t touch my TSP until I’m 59 1/2.
This is a common misconception, but it’s not entirely true. While generally, withdrawals before age 59 1/2 are subject to a 10% early withdrawal penalty (in addition to ordinary income tax), there are exceptions. One such exception is the Separation from Service rule. If you separate from military service during or after the year you turn age 55, you can access your TSP funds without penalty.
Now, here’s what nobody tells you: just because you can access the money doesn’t mean you should. The penalty might be waived, but you’ll still owe income tax on the withdrawal. Consider all your options before tapping into your retirement savings early.
I had a client last year, a former Army Sergeant stationed at Fort Benning, who was convinced he had no access to his TSP until he was much older. He was pleasantly surprised to learn he could potentially access it penalty-free upon separation, given his age.
## Myth 2: The TSP is only for federal employees while they’re working.
Wrong! The TSP is absolutely a valuable tool for veterans navigating military retirement plans. Once you separate from service, you have several options for your TSP account. You can leave the money in the TSP, where it can continue to grow tax-deferred. You can also roll it over into an IRA or another eligible retirement plan, like a 401(k), if you take a civilian job after your service. Or, as mentioned above, you can take a distribution (subject to taxes, and potentially penalties if you’re under 55).
The important thing is that your TSP account doesn’t just disappear when you leave the military. It’s yours to manage. According to the TSP website, you can manage your account online or by phone after you leave the service.
## Myth 3: The TSP has limited investment options.
While the TSP doesn’t offer the nearly limitless investment choices you might find in a brokerage account, it does offer a solid range of options to suit different risk tolerances and investment goals. These include the G Fund (government securities), F Fund (fixed income), C Fund (common stock index), S Fund (small-cap stock index), I Fund (international stock index), and Lifecycle Funds (L Funds). The L Funds are particularly useful because they automatically adjust your asset allocation over time as you get closer to retirement.
We had a case at our firm where a veteran, let’s call him Mr. Jones, thought the TSP’s limited options meant he couldn’t achieve his desired level of diversification. After reviewing his risk tolerance and retirement timeline, we showed him how strategically using the C, S, and I Funds could create a portfolio that met his needs. He was initially skeptical, but the performance over the next few years changed his mind.
A report by the Congressional Research Service (CRS) detailed the performance of various TSP funds, highlighting the historical returns and risk profiles of each option.
## Myth 4: TSP fees are high.
This is almost the opposite of the truth. The TSP is known for its incredibly low administrative fees. In fact, they are some of the lowest in the industry. As of 2024, the annual expenses were around $0.48 per $1,000 invested. This is significantly lower than many private-sector 401(k) plans and IRAs.
Why is this important? Lower fees mean more of your money stays invested and grows over time. Over decades, even a small difference in fees can have a huge impact on your retirement savings. Don’t underestimate the power of low fees! It’s vital to avoid retirement traps.
## Myth 5: TSP loans are always a good idea.
TSP loans can seem attractive, especially if you need cash quickly. But they come with risks. First, you’re essentially borrowing from your own retirement savings. If you don’t repay the loan on time, it will be considered a distribution and subject to taxes and penalties. Second, you’re missing out on potential investment growth while your money is being used to repay the loan.
Here’s what nobody tells you: If you leave federal service while you have an outstanding TSP loan, you have a limited time to repay it. If you don’t, it will be treated as a taxable distribution, potentially pushing you into a higher tax bracket. Be very careful before taking out a TSP loan.
For example, let’s say a service member stationed at Hunter Army Airfield takes out a $10,000 TSP loan. They leave the military and struggle to find a job in Savannah. They fail to repay the loan within the allotted time. That $10,000 is now considered a distribution, and they’ll owe income tax on it, plus a 10% penalty if they’re under 55. That’s a painful hit to their finances.
## Myth 6: Roth TSP is never worth it.
While traditional TSP contributions are made pre-tax, a Roth TSP offers a different approach. With a Roth TSP, you contribute after-tax dollars, but your earnings and withdrawals in retirement are tax-free. This can be a great option if you expect to be in a higher tax bracket in retirement than you are now.
Whether a Roth TSP is right for you depends on your individual circumstances. But don’t dismiss it out of hand. Consider your current and projected future tax brackets, your investment timeline, and your overall financial goals. For those looking to secure your financial future, consider all options.
For those stationed at Fort Stewart, consider this: you might be in a relatively low tax bracket during your early military career. Contributing to a Roth TSP now could save you a significant amount in taxes down the road. A financial advisor can help you determine if a Roth TSP is the right choice for you. Remember to avoid overpaying Uncle Sam by using tax-advantaged accounts.
Can I roll over my IRA into my TSP?
No, generally you cannot roll over an IRA into your TSP account. The TSP primarily accepts rollovers from other eligible retirement plans, such as 401(k)s or traditional IRAs.
What happens to my TSP if I get divorced?
Your TSP account is subject to division in a divorce, just like other assets. A court order, known as a Retirement Benefits Court Order (RBCO), is required to divide the TSP account. The RBCO must meet specific requirements set by the TSP to be valid.
How do I designate a beneficiary for my TSP?
You can designate a beneficiary for your TSP account online through the TSP website or by submitting a Designation of Beneficiary form (TSP-3). It’s important to review and update your beneficiary designation regularly, especially after major life events like marriage, divorce, or the birth of a child.
What is the difference between a traditional TSP and a Roth TSP?
With a traditional TSP, your contributions are made pre-tax, and your earnings and withdrawals are taxed in retirement. With a Roth TSP, your contributions are made after-tax, but your earnings and qualified withdrawals are tax-free in retirement. The choice between the two depends on your individual tax situation and expectations for future tax rates.
How can I get help with my TSP account?
You can contact the TSP directly through their website, by phone, or by mail. The TSP also provides educational resources and tools to help you manage your account. Additionally, a qualified financial advisor can provide personalized guidance on your TSP and other retirement planning matters.
Navigating military retirement plans like the Thrift Savings Plan doesn’t have to be confusing. By understanding the facts and dispelling the myths, veterans can make informed decisions that set them up for a secure financial future. Take the time to review your TSP account, understand your options, and seek professional advice if needed. Your future self will thank you. Another great way to secure your future is to build wealth with TSP and VA benefits.
