Heads up, Military Servicemembers and Federal Employees! What You Need to Know about the Thrift Savings Plan
For the past twenty-two years I’ve worked with clients who have a wide variety of workplace retirement accounts. From 401(k) to 403(b), including the Thrift Savings Plan (TSP). All of these programs vary in terms of their investment offerings, fees, and other characteristics. But the largest employer in the country–the U.S. government–has the TSP. It is the Federal government’s own ‘defined contribution’ plan. Both civilian Federal government employees (i.e. GS-types) as well as military servicemembers have access to the TSP. In fact, even our U.S. military veterans, can choose to keep their TSP accounts. One caveat: Veterans can no longer make contributions. But there are a multitude of things we can do to remedy that issue.
As a whole, all workplace-defined contribution plans are pretty similar in their features (i.e., many today offer Roth options, as well as, employer matches). However, the one big thing that makes the TSP unique is that it has lower fees compared to private-sector plans. This is a good thing. Another unique feature is that it has a fixed-income investment option, which is exclusive to the TSP.
Last year (2022), the Thrift Savings Plan saw some major changes, including the opening of a “Mutual Fund Window”. This is another positive, I believe. What it does is it supplements the previously very limited TSP offering of investment funds. One additional thing to note: Participants need to know that the associated expenses make it quite pricey. Another techy update to the TSP was the introduction of a smartphone app. This is cool, but it requires some time to implement. I know this because I recently helped a longtime client (a ‘nuke’ from Navy/Pearl Harbor who moved to New Jersey) navigate these new changes. He had to decide if investing through the Mutual Fund Window made sense for him; it did. We had to go through an entire re-registration process for the new site via the mobile app to ensure his critical information (i.e. beneficiary information) got transferred correctly.
It only makes sense that the majority of my military clients transition into new “encore” careers. They’re still quite young in comparision to the traditional, civilian retirement age here in the U.S. of age 60+. One thing I always emphasize is the need to compare and contrast what they have (TSP) versus what is now available to them (i.e. 401k, etc.). We always start by looking at balancing their new cash flow–what the can afford to sock aside–especially during their transition period.
As for my clients who are still on active duty, it requires an annual review like many of my civilian clients. What’s different about my valued military guys is this: they deploy. And when they deploy to combat zones, there are benefits, as well as related TSP considerations to be aware of. For one, their income earned while deployed in a combat zone is tax-free. This is a good thing, for sure. But we need to keep an eye on woefully blending or commingling this tax-free combat pay with taxable earnings. This messes things up. But we can work to prevent this by planning for it. From the get-go, I implore my military (and civilian) clients to communicate and keep me posted on recent changes, like going on deployments. We can avoid issues by making Roth contributions during periods where income is not taxed. Another point worth noting during a period of combat deployment is that the annual deferral limit increases quite drastically. Again, a good thing. This is an opportunity for them to contribute even more money to the TSP. Of course, it all boils down to cash flow. And very much like their civilian counterparts, I find that every single military client has a unique set of circumstances.
The bottom line is that the TSP is very similar to the other workplace retirement plans, such as the 401(k). However, Federal employees and especially, our hard-fighting military servicemembers have a very different job–they serve our country! For this primary reason, it is my mission to give back and serve their families.