By Alexander Canacci, Alonso Munoz
We can all remember our final days in uniform: turning in all required equipment, getting pages of signatures from various offices/departments, and numerous briefings with the Transition Assistance Program, but what about that Thrift Savings Plan?
The Thrift Savings Plan (TSP) is a type of Defined Contribution Plan offered to Federal employees that resembles a 401(k) Plan offered by private sector employers. For those in the U.S. Military, the TSP is now a key component of the retirement benefits offered after service. The federal government is one of the few employers that still offers a pension to those that serve (both military and civilian) after a minimum of 20 years of service. This Defined Benefit Plan works in tandem with the TSP offered and has slightly evolved since its inception – specifically in 2018 when the “Blended Retirement System” was fully implemented.
Before the Blended Retirement System (BRS), the previous retirement package offered to retiring service members after 20 years of service consisted of a defined benefit Plan equal to 50% of the base pay [1] of a retiring service member (an additional 2% added for every additional year of service past 20 years). During this time, the government did not contribute to the service members’ TSP. Under the BRS, the Defined Benefit Plan is equal to 40% of the base pay of a retiring service member (an additional 2% added for every additional year of service past 20 years), and now offers the possibility of government contributions to the service member’s TSP.
To offset the reduction in the Defined Benefit Plan, the government automatically contributes 1% of the service member’s salary with a matching opportunity up to an additional 4% (after 24 months of service). The maximum government contribution is 5% if the service member contributes 5% of their salary, and all government contributions become fully vested after 24 months of service. Akin to the 401(k), the maximum employee contribution allowed in 2024 is $23,000 with a $7,500 catch up contribution for those over 50 years old. Contributions to the TSP can be made in a traditional or Roth manner and withdrawals from a TSP can begin at age 59 ½ without incurring penalties. Of note, all government contributions are made to the servicemember’s traditional TSP account, even if personally elected contributions are made to a Roth TSP account.
The low fees associated with the funds provided are an attractive aspect of the TSP. As of July 2024, the TSP’s expenses are 99% lower than other investment options.[2] As of the date of this article, all the total expense ratios for available funds are below 0.08%. There are six different types of funds offered through the TSP, and service members can elect to contribute to an individual fund or a mixture of the funds available. They are:
- L Funds: Target date funds in five-year increments from 2025 to 2070
- G Fund: Government Securities
- F Fund: Fixed Income
- C Fund: Common Stock
- S Fund: Small Cap
- I Fund: International Equities
Another similarity between the TSP and 401(k) has to do with portability. After leaving the military, servicemembers can transfer part or all of their TSP balance into an Individual Retirement Account (IRA) or an eligible employer Plan (for example, an employer sponsored 401(k)). While routine contributions to the TSP after leaving service are not allowed, transfers can be made into the TSP both while in and out of service from IRAs or other eligible civilian employer Plans. An individual’s TSP will remain open after service so long as the balance remains greater than $200.
Out of all the things you have to worry about when you leave our great military, your retirement accounts shouldn’t be one of them. As we are all taught in the service, effective planning is key to mission success!
Rangers Lead The Way!
-CPT Canacci
[1] Calculated by averaging the base pay for the last 36 months of service
[2] According to tsp.gov, an official website of the US government
Bibliography
A Guide to the Uniformed Services BRS
Thrift Savings Plan (TSP): What Is Is and How It Works
The Blended Retirement System Explained | Military.com
https://www.tsp.gov/tsp-basics/expenses-and-fees/#foot_1
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