NMCRS Personal Finance Deck TSP — 17 December 2014

Recruit ClassroomOctober 9th 2001 marked the first day a service member could put part of their pre-tax pay into the Thrift Savings Plan (TSP). This new retirement savings vehicle would become a staple in the military members retirement savings plan over the next 13 years. Today the TSP has 11 different investment options broken down into five index funds, and six-life cycle funds. The reasons behind making the TSP (normally reserved for civilian federal employees) available to the military are many; however, the main idea is that less than 20% of all military members will retire from service. This means that over 80% of those who serve will have to find retirement funds and benefits from some other source. Enter the reason for the TSP; to provide the military member an alternate way to save for retirement.

The TSP is almost identical to the 401(k) programs of the civilian work force, whereby an employee can contribute part of their salary on a pre-tax basis to a savings program that has investment choices. The pre-tax contribution helps the employee reduce their annual income by putting the money in the account before their income taxes are calculated therefore lowering their annual taxable income. Additionally, should the employee leave the company, they can take their 401(k) with them to the next job, or move it to a Traditional IRA. The TSP works just the same. Military members can put up to 10% of their salary into their TSP, reduce their annual taxable income, and have portable retirement savings available to them if they are part of the 80% that decide not to stay the 20 years required for a military retirement.

The contribution limits for the TSP are pretty simple. You can put up to 10% of your salary into the TSP not to exceed annual amounts for 2014 of $17,500 for those under 50 years of age, and $22,500 for those over 50. In 2015 those limits will rise to $18,000 and $24,000 respectively. If you can afford to max out your contributions annually, you are certainly ahead of the game. However, most individuals cannot give up $17,500 a year on their current budget. Do not be discouraged by these large numbers. Consider that the annual contribution limits on IRA’s is only $5,500 and $6,500 for those over 50. The key, as in most cases for savings, is to start early.

There is a class given at each boot camp for recruits that talks about TSP. However, most recruits are so tired and glazed over that I doubt it makes a lot of since at the time. Nonetheless, if the recruit were to put $25 a month into their TSP for 10 years increasing the contribution only by 2% of their total pay raises, all into the S-Fund, they would have contributed a total of $3,284.88; a modest amount to save over 10 years. However, letting it continue to grow over the next 40 years, without any more contributions would yield a final sum of $183,060.61. Using the same model, a $50 per-month contribution would yield a final sum of $366,118.00.

Now these examples are oversimplified to provide an illustration for the point that early savings can yield great results if careful patient investing is utilized. This savings can become significantly important if a military member chooses not to put in over 20 years of service to qualify for a military retirement.

We all have to hedge against future events, or risk manage, if you like that term better. Some join the military intending only to serve four years and then return to their civilian lives, others join with the intention to serve over 20 years. No matter how well intentioned our original plans were, rarely do we ever end up exactly where we intended. The TSP can provide the flexibility for military members to add an extra layer of retirement security, no matter what their future intentions.

S/F,

Capt. Jonathon E. Rowles (USMC, Ret.)

 

If you would like to play with the TSP savings calculations for your personal financial goals, you can visit the “How Much Will My Savings Grow” calculator on the TSP website at: https://www.tsp.gov/planningtools/howsavingsgrow/howSavingsGrow.shtml

The “How Much Will My Savings Grow” calculator was used to create the illustration in the blog post.

 

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(6) Readers Comments

  1. The TSP is a great option, especially when you consider the low fees. I did notice one error in this article. It states, “You can put up to 10% of your salary into the TSP.” There is currently no limit on contributions besides the IRS limit.

    • Bethany,

      Thank you for your comment. Yes, you are absolutely right. You can put up to 10% of your salary into the TSP, the limits are set by IRS tax code line 1.401(k). Additionally there is a ROTH TSP option for both Military and Civilian employees. Regular TSP is considered “pre-tax” and Roth contributions are “post-tax.” However, the combination of contributions to both of these plans cannot exceed the 10% limit. Civilian employees must remember that they get a match on their contributions in their regular TSP, but not in their ROTH TSP.

      Great follow-on to the conversation! Thank you.

      Sincere Regards,

      Capt. Rowles (USMC Ret.)

  2. I’m sorry I wasn’t clear in my earlier comment. I was trying to point out that there is no 10% limit. I believe that limit was phased out a few years ago. My husband’s contribution to his TSP is currently over 50% of his base pay.

    • Bethany,

      Thank you for your on-going conversation. It benefits all of our readers and I encourage you and others to continue to participate.

      As far as the 10% limit, unfortunately it is still imposed on all individuals who participate in “elective deferral plans,” 401(k), 403(b), and TSP. The current regulation caps our contributions into these plans at 10% of our annual income or $18,000. This is to allow for many workers to save in addition to their personal IRA’s and other retirement vehicles, and it also protects against “harboring” funds in protected accounts, which is why there is a limit to the contributions. For federal employees, including military, there is a nice factsheet put out by the Office of Personal Management (OPM) titled “Annual Limit on Elective Deferrals.” It can be found at https://www.tsp.gov/PDF/formspubs/oc91-13.pdf

      Now the caveats: An individual can put more into their TSP, 401(k), or 403(b) than the $18,000 limit under Internal Revenue Code (I.R.C.) 415(c) in special circumstances such as placing tax exempt combat pay in to the accounts. Be cautious though, the TSP website states that in January of each year TSP agency goes through all accounts and insures that individual contributions did not exceed the elective deferral limit. If an individual placed more than the allowable amount, those funds along with any earnings will be returned.

      I must apply a word of caution when mixing before and after tax funds in the same retirement account. The accounting can get tricky and there is a special tax formula applied to ALL funds, tax exempt or not, when they are removed from the account.

      Again thank you Bethany for your continued comments and visibility on this issue. Your questions and comments benefit all of our members!

      S/F,

      Captain Rowles, USMC (Ret.)

  3. Thanks for the link to the TSP publication. It is very informative. I see the $18000 limit clearly stated, but I’m still trying to figure out where you are getting the 10% of annual income limit. For the past two years, my husband and I have contributed the maximum to a TSP, 401(k), and 2 IRAs, which is certainly more than 10% of our on an annual income. Our CPA has not objected at all.

    • Bethany,

      Thank you for your continued conversation! It is wonderful to interact with our NMCRS readers. First let me apologize for the ambiguity in my response regarding the 10% on annual income limits. What I should have said is that “restrictions CAN be placed on elective deferral plans.” The 10% comes from restrictions that employers are allowed place, if they choose, on their sponsored retirement plans. The 10% figure is not always the case when employers restrict contributions; however, it does seem to be a popular figure for contribution limits if they are imposed. The TSP both Federal and Military have no such restrictions and there is no IRS restriction regarding 10% of annual income. The only restriction regarding the Federal and Military TSP contributions is the max of $18,000 that may be allotted for the 2015 tax year.

      You may see the 10% figure come up in another matter though. If an individual were to take money out of an IRA, TSP, 401k, any tax deferred retirement vehicle before age 59 1/2 they would be subject to a 10% premature withdrawal penalty. There are waivers for this penalty, but they are very restrictive.

      Thank you for your clarifying point. This is a great conversation and many readers will benefit. Thank you again for your comments and questions!

      S/F,

      Captain Rowles, USMC (Ret.)

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