Will you be ready for retirement? Over 40% of Americans report they’ll probably need a miracle to become retirement ready.
For U.S. military service members, there’s good news. The military Thrift Savings Plan was expressly designed to help them secure retirement.
Like most federal programs, navigating a Thrift Savings Plan for military service can be tricky at first. This comprehensive guide straightens out all the overlapping bureaucratic segments.
What Is the Thrift Savings Plan?
The Thrift Savings Plan is a retirement benefit offered to qualified federal personnel, including the military. It’s more or less the public sector version of a 401(k), with a few key differences.
You must be a federal government employee or uniformed services member to open a TSP account. Uniformed services include:
- U.S. Army
- U.S. Marine Corps
- U.S. Navy
- U.S. Air Force
- U.S. Space Force
- U.S. Coast Guard
- U.S. Public Health Service Commissioned Corps
- National Oceanic and Atmospheric Administration Commissioned Officer Corps
Depending on federal employment, there are three different retirement systems:
- Blended Retirement System (BRS)
- Federal Employee Retirement System (FERS)
- Civil Service Retirement System (CSRS)
TSP conditions and benefits vary depending on the system. The military’s Thrift Savings Plan falls under BRS.
What Is the Military Thrift Savings Plan?
Military service members in the Department of Defense (DoD) who enlisted after January 1, 2018, are automatically enrolled in BRS. Service members who enlisted beforehand had the option to choose BRS or the legacy retirement system.
Those who chose the legacy option in 2018 are currently unable to switch to BRS. The only exception is broken enlistment during the decision period (Jan. 1-Dec. 31, 2018).
The military TSP is a more flexible retirement option than the legacy system. Under the old system, less than 20% of service members saw any retirement benefits at all.
The new system allows service members to retain some retirement contribution benefits, even if they don’t serve a full 20-year career.
How it Works
Military TSP is a defined contribution plan. These contributions come from the service member’s service/agency and their federal (base) pay. There are three main contributions under BRS:
- Service Automatic Contribution (1%)
- Regular Employee Contributions (flexible but cannot exceed maximum limits)
- Service Matching Contributions (up to 4%)
BRS currently deducts 5% automatically from a service member’s pay if they joined after October 1, 2020. However, they can still modify or opt out of this contribution.
Combined service contributions max out at 5%. Anything above the first 5% of pay contributed per pay period is not matched.
Additionally, only 3% of employee contributions are matched at 100%. The remaining 2% is matched at 50 cents per dollar.
Military service members aren’t limited to base pay contributions. They can also contribute 1%-100% of their:
- Incentive pay
- Special pay
- Bonus pay
These contributions cannot exceed IRS limits. The IRS sets a combined maximum contribution per year, called the annual elective deferral limit.
These limits are subject to increase every few years. The limit for 2022 increased to $20,500, up from the maximum of $19,500 between 2020 and 2021.
The military retiree Thrift Savings Plan also allows a “catch-up” amount for service members age 50 and up. The catch-up limit is $6,500 per year.
Traditional vs. Roth TSP
Like Individual Retirement Accounts (IRAs), service members can choose a traditional or Roth tax treatment plan. Each type has unique benefits and drawbacks.
A traditional TSP defers taxes on both contributions and earnings until withdrawal. This option is useful for people who may be at a lower tax rate when they retire.
A Roth TSP taxes your contributions, but your qualified earnings can be withdrawn tax-free. This option is for people who plan to be in a higher tax rate when they retire.
You can also use a mix of both funds. But according to TSP.gov, service contributions will go into your traditional TSP balance and cannot be switched into your Roth.
Types of Funds
There are two main types of TSP funds: the L (Lifecycle) Fund and Individual Funds. Individual funds are broken down into different categories by their different investment strategies:
- G fund: government securities
- F fund: corporate and government bonds
- C fund: S&P 500 Stock Index funds
- S fund: Dow Jones U.S. Completion (TSM) Index funds
- I fund: MSCI EAFE Index funds
Each fund offers its own mix of risk and return. The G fund has low risk but low potential returns, while the I fund is high risk but offers high return potential.
L funds are a mix of the other funds and are managed based on investment maturity. Service members close to retirement will have an L fund with stable assets, for example, while someone 20 years from retirement can tolerate more risk.
Additional Military Thrift Savings Plan Benefits
TSP has some of the lowest fees out of any retirement fund. 401(k) funds can charge 10 times as much for similar investments.
One of military TSP’s biggest perks is continuity. Service members won’t have to start their employment-related retirement savings over from scratch, even if they didn’t retire in-service.
Before TSP, service members who didn’t reach full retirement had nothing to show for their years of service. They had to rely entirely on outside retirement investments.
Service members who separate early won’t be able to make additional contributions. Vested accounts with a balance greater than $200 can continue to earn interest, however.
Vesting refers to the amount of time for asset ownership to transfer from employer to employee. FERS vesting is typically three years, while BRS members become vested after two years.
Service members can also withdraw their contributions as payouts or lump sums. Or they can roll them over into private accounts like a 401(k) or IRA under their new employer.
How to Enroll in Military Thrift Savings Plan
Like other military benefits, TSP enrollment is automatic for most service members now. Members who haven’t been automatically enrolled yet can use MyPay or their finance office’s process.
Service members can also directly manage their accounts through MyPay and TSP’s official website. Contributions are managed through MyPay. Account services like designating a beneficiary, changing addresses, and changing investment options can use TSP’s site.
Getting the Benefits You Deserve for Your Time in Military Service
The military’s Thrift Savings Plan offers service members long-lasting retirement options with many benefits. From low administrative fees to managed investments, you’ll get the retirement rewards you have earned.
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