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."
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.