Thrift Savings Plan Options You May Not Be Taking Advantage Of

by John Cooney on Sep 5, 2019

retirement, military retirement, FERS, military financial planner, TSP

Hopefully, if you are eligible for the TSP, you are taking advantage of all the benefits available to you.  Low fees, professionally managed funds, and new withdrawal rules aimed at giving you flexibility when taking your money out of your account are three main benefits to the TSP.  When contributing, you also need to be aware of the options available to you to maximize the tax efficiency and amount you are contributing.  Take a few minutes today to get to know two of the TSP options available to you, whether you are eligible, and how you can benefit.    

Roth TSP

Contributions to the TSP come in 2 flavors, traditional (pre-tax) and Roth (post-tax).  You can contribute just traditional, just Roth, or a combination of both.  A traditional contribution is a pre-tax contribution.  This means the amount you contribute is deducted from your income in the year of the contribution, lowering your tax liability for that year.  The contribution then grows tax-deferred within your TSP account, and when you withdraw the money in retirement you pay income taxes on the total amount of the withdrawal.  A Roth contribution is a post-tax contribution.  This means the amount you contribute is included in your income in the year of the contribution, but then grows tax-free within your TSP account.  When you make a withdrawal from a Roth account in retirement, the total amount of the withdrawal is tax-free.  The decision to contribute to a Roth or a traditional account usually comes down to whether or not you believe your income tax rate will be lower or higher now than it will be in retirement.  If you think your tax rate is higher now, you would make a traditional contribution, take the tax deduction now, and pay taxes later, when you believe your taxes will be lower.  If you believe your taxes will be higher in retirement, than you’d contribute to a Roth now, pay the taxes at today’s rates, and withdraw the money tax-free in retirement.  There can be other considerations to take into account as well and it is best to consult with a financial advisor if you are trying to decide which contribution type is right for you.  That said, you can’t be wrong in making contributions, regardless of type and don’t let a decision over the tax treatment of the contribution delay you from contributing to your TSP today.

For service members currently deployed to a tax-exempt combat zone, they can take advantage of triple the tax savings.  By making a Roth contribution out of tax-exempt pay, they can avoid paying taxes on the income (it’s tax-exempt), and then when they make a withdrawal in retirement, their contribution and the earnings on that contribution will be tax-free as well.  In nearly all circumstances, Roth contributions from tax-exempt pay will be that service member’s best option.  Click on this article for a more in-depth explanation of this strategy.

Catch-Up Contributions

Behind on your retirement savings?  Wish you had another option for tax advantaged savings?  Over 50?  Well you are in luck!  Individuals over 50 are allowed to make what are called catch-up contributions to retirement plans such as 401Ks, IRAs, and to the TSP.  In 2019, all participants in the TSP are eligible to contribute up to $19,000 to their TSP.  If they are over 50, they have the option to contribute an additional $6,000, bringing their total contribution limit to $25,000 in 2019.  As long as you will turn 50 at some point during 2019, you are eligible to make catch-up contributions.  Just like regular contributions, catch-up contributions can be traditional or Roth.  However, service members in a tax-exempt combat zone who are receiving tax-exempt pay can only choose Roth contributions as catch-up contributions. 

For those who started saving late, want to retire earlier, or just need a tax-advantaged savings strategy, catch-up contributions can play a major part in your retirement savings plan.

Still have questions on the TSP?  Want to talk about which contribution type is best for you?  We are here to answer your questions and help set you up for retirement success.