Thrift Savings Plan Provides Important Benefits to Troops

By Sgt. Sara Wood, USA

Dec. 8, 2006 – More servicemembers need to take advantage of the Thrift Savings Plan, because it is an attractive investment option with unique benefits for military members, the military officer in charge of the Armed Forces Tax Council said here today. TSP, a retirement savings plan for servicemembers and civilian federal employees, right now draws participation from about half of the military, Army Maj. John Johnson, director of the Armed Forces Tax Council, said in an interview.

"Certainly we'd like to see that participation rate go up, because it's a great benefit," Johnson said. "It's important that everyone obviously be saving for their retirement in the first place, and if you're going to be saving, the first place you want to put it is in tax-deferred or tax-exempt retirement accounts."

TSP is a tax-deferred fund, which means the money contributed to the account is deducted right away from the person's taxable income, and the money in the fund isn't taxed until it is withdrawn at retirement. This represents a significant savings over the years, Johnson explained.

"If you weren't in the TSP or another tax-deferred account, every year, the income in that fund (would) get taxed," he said. "If you look over your whole 40-year career, generally speaking, you're going to pick up a couple hundred thousand dollars by contributing to a tax-deferred account as opposed to a taxed account."

As of this year, military members are unlimited in the amount they can contribute to TSP, Johnson said. When the program was first made available to servicemembers in 2000, they could only contribute up to 5 percent of their income. Now the only limit is the Internal Revenue Service's $15,000 per-year limit on contributions to tax-deferred accounts, he said. He noted that most military members won't come close to that limit if they contribute 5 or 10 percent of their income to TSP.

Deployed troops have different limits in TSP, Johnson said. Because their income is tax-exempt and the IRS has a separate limit for that category, they can contribute up to $44,000 per year, he said.

As another benefit to servicemembers, the Army is testing a program where the service matches soldiers' contributions to TSP, Johnson said. This program only applies to new enlistees who fill critical specialties. The Army will match 5 percent of the pay the soldier contributes to TSP; the first 3 percent will be matched dollar for dollar, and the next 2 percent matched 50 cents on the dollar, he said.

Even for troops who have been in a while and won't get their contributions matched, TSP is a good idea, Johnson said. A major benefit of the program is that the expenses on the accounts are very low - about one-tenth of the average private mutual fund. The money that in the private sector would be used to manage the fund, buy stocks and pay other fees goes straight to the servicemember's bottom line in TSP, he said.

"You'll have a hard time beating TSP," he said.

TSP is not like a savings account, Johnson emphasized, and the money contributed to it should be money that people aren't going to need soon. However, TSP does have a loan program for situations such as a first home purchase, where participants can borrow money from their own account and then pay it back at a market interest rate.

After leaving the military, servicemembers cannot continue contributing to TSP unless they take a federal job, Johnson said. They can leave their money in TSP, though, and continue to draw returns on it. The money in TSP can also be rolled over to another IRA account, he said.

TSP is a great benefit that is overlooked by a lot of military members, Johnson said. Those who can contribute should, and those who can't contribute should seriously evaluate their financial situation and look at how they are preparing for the future, he said.

"You need to get yourself in a position where you can save, and then we just think that the TSP is a great option to put that savings," he said.

Servicemembers can sign up for TSP online at www.tsp.gov, Johnson said. This Web site offers all the tools troops need to get started in the program and manage their accounts.

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