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Thrift Savings Plan for All

By Ian Burgess, Command Financial Specialist
Source: Military Saves

As Social Security diminishes and pensions begin to become non-existent, those of us under fifty need to start planning for our own retirements.  Using a tax-advantaged retirement account such as an IRA or 401K is one of the best ways to save for your future retirement goals.  That sounds easy but it can really confusing choosing the best one for you.  So confusing in fact that most people put off saving for retirement until it's too late.  The choice is easier for US Government employees and uniformed service members because we have the benefit of the Thrift Savings Plan.

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My favorite part about TSP is how easy it is to begin and manage your contributions.  Through the myPay website, you can designate a percentage of your base pay to be deducted monthly from your paycheck with only a few mouse clicks.  You can also contribute any special or bonus pay such as flight pay but I think it's easier to just contribute from base pay only.  Through the TSP website, you can control your account by choosing which mix of the five basic funds you want.  On the other hand, IRAs must be opened through a broker and have millions of investment choices.

Not only is it time consuming and more confusing to open an IRA, but it can be more costly too.  Whether paying adviser fees, trading fees, or administration fees, maintaining an IRA can cost you an average of 1% of your yearly account balance.  All those fees will have an obvious negative affect on your retirement goals.  TSP administration fees are only .028% per year; virtually zero in my book.

Saving under TSP has a psychological effect as well.  Because the money transfers before you see it, you hardly notice the difference.  With the IRA, you have to save the money first and then manually make your contribution.  Studies have shown that people spend more liberally when they have access to money and vice versa.  When you make automatic deposits, you won't be tempted to buy that new TV because the money's been used for something more important.

The same is true with taxes in eyes of the IRS.  Because the money is invested before income tax, your monthly tax bill is lower.  So if you invest $400/month, you save $100 in taxes so your pay is only reduced by $300/month.  A traditional IRA carries the same benefit but you have to wait until you file your tax return to realize the tax savings.

And if you're addicted to saving money like me, you'll like the higher contribution limits with the TSP.  The IRS sets maximum contribution limits, adjusted yearly for inflation.  TSP is currently $16,500 while IRAs are $5,000.  Both accounts have large penalties for withdrawing money before you reach retirement, but TSP allows a 5-year personal loan or 15-year home loan from your account, although these are not usually recommended. 

The Thrift Savings Plan should not be your only plan for retirement but it's the easiest and cheapest way to start.  It's never too late to start investing for your future.  If you aren't prepared, you could be working forever.  See your Command Financial Specialist for assistance on starting TSP or an IRA.



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