Thrift Savings Plan -- A Great Option for Federal Government Employees, Not Military Members

The Thrift Savings Plan (TSP) is a great option for Federal government employees because they earn a matching contribution from the Federal government. But, for members of the military (e.g. Army), who do not earn a match, there may be better options for retirement investing depending on their tax situation. So before deciding to contribute to the Thrift Savings Plan, members of the military should consider other alternatives, such as a Roth IRA, and weigh their options carefully. First, let me explain exactly what the Thrift Savings Plan is, and then I'll go on to explain why it's not a great option for military members:

What Is the Thrift Savings Plan?
The Thrift Savings Plan, which is often lovingly referred to like most things in the military solely by its initials "TSP," is a retirement plan for Federal employees and members of the military, designed to mimic the features of the commonly known 401k plan. The Thrift Savings Plan was created by Congress in 1986 for Federal employees as an additional means to save and invest for retirement. The Federal Thrift Savings Plan offers the same savings and tax benefits that many private companies offer their employees in 401k plans.

Contribute Enough to Earn the Employer Match
In all 401k retirement plans, employees should contribute enough in order to capture their employer's matching contribution. The same is true for Federal employees who can contribute to the Thrift Savings Plan. Most Federal employees of the United States government are members of the system called the Federal Employees Retirement System (FERS). As a civilian Federal employee, the employee receives a matching contribution on the first 5% of pay that he or she contributes. The matching contributions to the Thrift Savings Plan are in addition to the Federal employees' FERS pension. Just as one would do with a 401k plan, an employee should invest at least enough to earn the matching contribution because it is the equivalent to earning a 100% return on his or her investment. Why not take full advantage of this free money?

The Problem for Military Members: They Do Not Earn a Matching Contribution
Members of the military do not receive any matching contributions from the military for money that they invest in the Thrift Savings Plan. So, for many military members who do not earn a lot of money and are subsequently in a low tax bracket, it makes more sense to invest in a Roth IRA over a TSP. The reason I say this is because a Roth IRA is unique in that only the money that goes into the Roth IRA is taxed. Any profits made on investments in the Roth IRA are not taxed when you withdraw the money at retirement. So if you're in a low tax bracket, it makes sense to get taxed now instead of later, when hopefully you're earning more income and are in a higher tax bracket. Take advantage of your low tax rate when you can!

In the case of the Thrift Savings Plan, money is taxed when you withdraw it, meaning the tax losses could be significant if your investments performed well. Now, if military members were eligible for matching contributions in the TSP, I would not be so against it since this would be a distinct advantage over the Roth IRA in that it is providing you with "free money."

Conclusion
There are many retirement and investing options for members of the military and civilian employees of the Federal government. Careful consideration must be taken when choosing the right options for each individual based on their own circumstances. Federal employees are fortunate to receive a pension during retirement and to get the benefit of matching contributions in their Federal Thrift Savings Plans. Military members, on the other hand, have a harder decision to make. Since the Thrift Savings Plan does not provide them with matching contributions, military members need to consider other investment options, including one of my favorites: the Roth IRA.

Are you a federal employee or military member? Where have you decided to invest your money?

Hank Coleman is a captain in the U.S. Army and writes about financial topics like saving, investing, and retirement for Military Money Might as well as the Money Crashers personal finance blog.

The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2010, at 2:28 PM, mwallace2775 wrote:

    CPT Coleman,

    I heartily agree that military members get the short end of the stick when it comes to having a "401(k)", (a.k.a. the TSP) that does not offer a match. However, it would be irresponsible to fund only a Roth IRA and nothing else (as long as you have the cash to do more).

    Tax diversification is just as important as asset diversification. Also, for someone who doesn't make a whole lot, they are more likely to drop down a tax bracket by writing off some income to a tax-deferred plan than someone who makes a lot more. In addition, now that the income limit for conversion of traditional-to-Roth IRA has gone away, putting money in the TSP will allow you to "hide" it and then roll it over and convert it once you separate/retire from the military. If a member retires at the age of 40 and does a conversion with the money accumulated in their TSP, it will then grow tax-free for the next 20-30 years. All of the above is especially true for members who don't plan on staying the full 20 years and collecting a pension.

    Bear in mind that when a member is deployed to a combat zone, any principal they contribute to the TSP is tax-free. Granted, earnings on that principal ARE taxed. On the same topic, when deployed to a combat zone, the contribution limit goes up from $16,500 to $49,500 for that year. Caveat being that you have to contribute that sum while you are in the combat zone. You can not contribute $20,000 while overseas and then expect to contribute another $29,500 when you return. However, you could contribute $33,000 tax free overseas and then another $16,500 when you get home, but that $16,500 would be tax-deferred.

    Finally, even though the TSP isn't matching and offers only a few investment options, those options are basically index-fund ETF's with ridiculously low expense rations (consistently under 0.1%, sometimes as low as 0.02%!). Since the majority of mutual funds and many individual investors routinely lose to the market, "buying the market" at a very low cost seems like a reasonable strategy.

    This is crazy! I never thought I'd find myself defending the TSP, which I consider one of the least flexible retirement vehicles out there, but it does have certain benefits, you just have to be creative, diligent and patient to get them to work in your favor.

    Maj (Dr.) Matt W, USAF

  • Report this Comment On November 11, 2010, at 8:18 PM, jc09058 wrote:

    For most member of the services, which covers E-1 thru E-5 and O-1 thru O-2, any kind of savings is very difficult due to low pay and high bills. This is more true when the service member is married with or without kids. Usually, it's getting all of the latest toys that is the first thing on their mind, with fast cars being the usual second.

    Plus age and education works against them as well. Tomorrow (retirement) is a long ways down the road, and for a large number of those people that are deployed, the only thing they are really thinking about is trying to NOT get killed today rather than how much more I can put into my TSP next pay period. In truth, most of them are thinking on how to spend "their" money when they get back home.

    Yet while the TSP sounds like a good idea, each time my wife (the service member this time) talks about it and I read the pamphlets, I find myself thinking the same thing. It is too limited and there is no real opportunity to earn money. Where the money is placed does not give a whole lot of confidence either.

    Lastly, I do a lot better in my brokerage account, my Roth IRA, and my kids UTMA college accounts than TSP. Last time I heard about TSP they offered 6% return and someone once mumbled something about 10% once. Big deal. Honestly, investing in decent companies that pay good dividends can earn you more money. I know because we are over 6 figures and growing after five years in the Army. I might add that was three years ago. You just can't do that with a TSP.

    Jim C., MBA, ex-USAF

    Unemployed spouse of an Army E-5

  • Report this Comment On November 11, 2010, at 8:33 PM, MRMUTT wrote:

    Federal employee who get matching contributions do not also get a pension...they get Social Security benefits. Federal employees prior to 1983 belong to the CSRS and if they did not convert to FERS, are the ones who get a pension. They do not get any matches in the THRIFT Plan. A very important point, which diminishes the thrust of your article and argument. Respectfully speaking, get your facts straight before you bash Federal employees, especially if you are trying to create a rift between them and those who serve in uniform. You might also point out that Federal employees get their Social Security benefits reduced if they collect a Federal pension. This does not happen with any other pensioner. I don't hear anyone crying for the Federal employee over that. I don't find it okay to be anyone's whipping boy. Thank you.

  • Report this Comment On November 11, 2010, at 11:27 PM, saturn2187 wrote:

    MRMUTT writes "get your facts straight before you bash Federal employees". You say that Federal employees who get matching contributions do not also get a pension..

    Sorry to point it out, but you're wrong. I'm a federal employee hired under the new FERS program and we do get a pension, PLUS matching contributions, PLUS social security.

    Granted, the pension isn't as large as the CSRS employees. For a 20 year employee earning 50k per year it works out to about $850 per month, or about 10k per year. But its most definitely a pension, as you incorrectly stated we are not eligible.

    It's called FERS pension. And our social security benefits are not reduced when we draw it either.

    Thanks

  • Report this Comment On November 12, 2010, at 11:06 AM, FoolTheRest wrote:

    Hank,

    Service members' money management has been a hot topic for me for many years. So much so that I used to teach a course to my soldiers before deployments and counsel them. Because TSP is not matching for those in uniform, I advise maxing a Roth IRA first. Then, max TSP, and finally, find a good brokerage for the rest, if there is any. If you are deployed, these take a back seat to one investment I hear little about: the Savings Deposit Program (SDP). This program provides military members the opportunity to invest up to $10,000 at 10% interest while deployed. There are some goofy rules about contributing, but it is still well worth it. I do not know a better plan with this much guaranteed interest.

    The problem many soldiers face is that of spending. Like many Americans, if it is in the bank, it is available. To those who cannot control it, I recommend putting as much into TSP as possible. That way, it never hits your bank. TSP is not terrible, either. The fees are the lowest I have found and the choices are simple. Many civilian 401ks (mine included) would be better served by such a plan than they are currently being bilked for.

    fmr CPT Joseph Sikorski, USACE

  • Report this Comment On November 12, 2010, at 11:15 AM, prginww wrote:

    The good captain makes some excellent points, but I think his audience is probably on the small side. Unfortunately, there aren't a large number of military folks taking an active role in saving for their future. For those who do, funding a Roth before the TSP makes good sense. For everyone else (easily 80-90% of the youngest members), putting money in the TSP is, I think, a "no-brainer." They get in the habit of paying themselves first, get the tax-deferral, get the ridiculously low expense ratios (noted by the major), and get to do it all on auto-pilot. For those who don't want to bother with asset allocation, the Lifecycle Funds provide true fire-and-forget capabilities.

    For those service members who are intimidated by investing, or just plain uninterested in it, the TSP is a fantastic benefit. For everyone else, it's a great way to get low-cost, market-tracking tax-deferred returns.

  • Report this Comment On September 29, 2011, at 3:45 PM, biigjoninhawaii wrote:

    Folks,

    I agree with some of the comments and disagree with some of the comments on here.

    BLUF for my two cents is to have your liquid savings (probably 3-6 months), always take advantage of the USSDP when deployed, then the Roth, then the TSP (there is a "Roth TSP" to be offered in 2012, BTW...read on) and then other investments. To say the TSP is not a good option for military is simply very inaccurate in the vast majority of situations.

    I'll try to make this concise.

    1. Agree that the US Savings Deposit Program (USSDP) can't be beat while deployed. You earn a guaranteed (risk free) 10% annual interest on up to $10,000, and you can leave it to continue to earn up to 90 days after you return from deployment. Earnings are taxed, but coming out of a deployment year, most will be in a low tax bracket due to the Combat Zone Tax Exemption (CZTE) anyway.

    2. Agree that for most young Soldiers, a Roth is probably the right way to go for the first $5,000 they have to invest. Tax free earnings in retirement are hard to beat. Downside for many mid grade NCOs and junior officers (or higher ranking with the discretionary income to invest) is that the Roth limits annual contributions to only $5,000 this year, unless you're over either 50 or 55 (or older) and you can add another $1,000 using the 'catch-up provision'. Just not enough to add up quickly if you can afford to contribute more.

    3. STRONGLY DISAGREE that the TSP is not a good investment vehicle for military members. While you don't get a broad choice of investment options, those that are offered are very, VERY low cost, and they are good (maybe not great) indexes to own. I am a believer in the efficient market theory which essentially holds that, among other things, a fund manager may 'beat the market' over a year, even three or MAYBE (if he's good AND lucky) even five year time horizon...BUT in the end, he's very UNLIKELY to beat the market over the long term. Lots of academic studies have been done, and over 10, 15, 20 year time horizons, a fund manager beating the computer run index fund is almost nonexistent (Bill Gross had a very good run). And of course you're paying that well paid fund manager to, well, live the life of a well paid fund manager (and all of his subordinate analysts, support network, office in lower Manhattan, Boston or San Francisco, advertising and other expenses) and that adds up (compounds over the long haul, just like compounding interest, except this comes OUT of your pocket).

    One often overlooked aspect of the TSP for military members is that it can be rolled over into a Roth IRA, and the income limits on doing so were changed in 2010, allowing those in higher tax brackets to convert. But here's the kicker for military personnel: DO THE TSP-TO-ROTH IRA CONVERSION WHEN YOU ARE DEPLOYED (in CZTE status). You are in a very low tax bracket that year (due to your CZTE status), and you get the tax free distributions in retirement years down the road because you converted from the TSP (tax deferred vehicle) to a Roth IRA (tax free vehicle).

    Another HUGE benefit of the TSP is the tax deferral feature. If I max out my TSP contributions ($16,500 this year) and my marginal tax rate is, say 25%, approximately $4,000+ that I otherwise would have given to the tax man instead goes into my TSP to grow, and grow and grow over the years and decades until I retire and withdraw. Granted, I settle up with the tax man when I pay taxes on those withdrawals, but those savings have grown an awful lot by then...

    Oh, and another consideration for TSPs: In early 2012, they are due to introduce a "Roth TSP" feature, which essentially allows you to contribute up to $16,500 (plus $5,000 more if you're old enough for the "catch up contributions") and, although you pay taxes on the contributions, the entire amount (contributions plus earnings) is tax free when withdrawn in retirement. Of course you don't get the tax deferral benefit of your standard TSP contributions (which can be a big deal if you're in a high tax bracket), so you need to carefully consider the pros and cons of each. Generally, the younger you are, the more the Roth feature (whether in a Roth IRA or the Roth TSP) makes sense, and when you are older and generally in a higher tax bracket, you may need the tax deferral of the standard TSP right now. You also need to consider whether you believe you'll be in a higher or lower tax bracket in retirement, based on your tax bracket (anticipated income level) and where you think tax rates are headed in the future (hint: it rhymes with "up" in my opinion).

    So, I say if you can afford it, you disregard the TSP at your own peril. The Lifecycle Funds are another good way of getting automatic asset allocation based upon your time horizon, guaranteeing your money is invested more conservatively as you near retirement, which is a generally accepted priciple of investing.

    Great forum, and I'm sure I'll be on here a lot more going forward.

    Thanks,

    JOHN

  • Report this Comment On February 03, 2013, at 11:39 AM, MUCM wrote:

    If you are maxing out your Roth IRA, service members should also be taking advantage of TSP. Now with the Roth option it makes it even more attractive. I have been maxin out my TSP since inception and I am glad that I have.

  • Report this Comment On February 03, 2013, at 12:17 PM, Cammoman wrote:

    Capt, I think you are well intentioned, but miss the whole reason the TSP was rolled out for military... It is the first step in taking away "ie: reforming" our current pension.

    The military (active duty) retirement system is arguably the best retirement deal around. Unlike most retirement plans, the Armed Forces offer a pension (technically a "reduced compensation for reduced services.") with benefits, that start the day you retire, no matter how old you are. That means you could start collecting a regular retirement pension as early as 37 years old. What's more, that pension check can grow with a cost of living adjustment each year.

    Just do a key word search on reforming military retirement and you can check this for your self. http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA342392

    ... For me I fund my Roth first, then fund TSP (I had 15% growth last year with some tax free from combat zone pay). Also, many military troops as you know are busy, checking the box to take out a small percentage of pay each LES is very easy versus getting dinged by a broker, high sales charges or 12b-1 fees... TSP has no fees and if our troops need some down money for a house... they can even take some of the TSP saved money out at as a loan (currently 1.5%)... TSP does serve a need, but once Uncle Sam decides to kick in his money, he'll pull it "borrow" it from somewhere else...likely your 20 yr retirement guarantee... TSP was never meant to be a retirement for military as it is for the GS employees... but keep your eyes peeled--you may get your matching funds wish...once they reform your primary retirement pension.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1366332, ~/Articles/ArticleHandler.aspx, 10/20/2014 4:26:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 16,380.41 263.17 1.63%
S&P 500 1,886.76 24.00 1.29%
NASD 4,258.44 41.05 0.97%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement