A detailed overview of everything you need to know about the TSP retirement account. Breakdown what is a TSP, what funds are available within a TSP, and the expense ratios associated with the TSP.
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What is a TSP (Thrift Savings Plan)?
Financial planning is essential for anyone looking towards a secure financial future. Individuals, especially those who work for the federal government or military, have access to a unique retirement savings plan known as the Thrift Savings Plan (TSP). The TSP is a retirement savings and investment plan designed to help federal employees and military personnel accumulate a substantial nest egg for their post-employment years.
Established by the Federal Employees’ Retirement System Act of 1986, the TSP is considered one of the most beneficial retirement savings plans in the United States. It offers these employees a low-cost, tax-advantaged way to save for their future.
The TSP operates similarly to a 401(k) or a 403(b) plan, which are common in the private sector. Employees contribute to the plan by allocating a portion of their paycheck directly into their TSP account. These contributions are tax-deferred, meaning they are deducted before taxes and can help reduce an individual’s taxable income. However, employees are subject to income taxes when they withdraw funds during retirement.
One of the most significant advantages of the TSP is the option for employer matching. Depending on the type of federal employment or military service, employees may receive up to a 5% dollar-for-dollar match on their contributions. This generous matching program enhances the growth of an employee’s retirement savings.
Once an individual has contributed to their TSP account, they can choose to invest their funds in different TSP investment options. The TSP offers a range of funds, including government bond funds, stock market index funds, and lifecycle funds. Employees can create a diversified investment portfolio based on their risk tolerance and desired level of growth.
Moreover, the TSP boasts incredibly low fees compared to other retirement savings plans. These low fees are possible due to the TSP’s size and its unique administrative structure as a government program. Consequently, employees can keep more of their investment funds, leading to greater long-term growth potential.
While the TSP primarily serves as a retirement savings plan, it also offers two other withdrawal options. The first is for financial hardships, allowing participants to take an early withdrawal in case of immediate need. The second option is for individuals who have reached age 59 1/2 and wish to withdraw funds while still employed. This flexibility provides a safety net for unforeseen circumstances or personal choices.
With over six million participants and more than $700 billion in assets, the TSP is a highly reputable retirement savings plan. Its commitment to low fees, employer matching, and investment diversity make it a valuable option for federal employees and military personnel. By taking full advantage of the TSP, individuals can ensure their financial security during their post-employment years and enjoy a comfortable retirement.
*Correction to a comment I made New Military Retirement*
The New Blended Retirement does still include a pension. It is 2% of your base pay times by years of service for active duty service members.
1. Defined Benefit:
* Retired pay will be 2% times number of years of service. If you retire at 20 years you get 40% of your final base pay. If you retire at 30 years you get 60% of your final base pay.
2. Defined Contribution:
* The military would contribute 1% of your base pay to your Thrift Savings Plan (TSP) account.
* You would be automatically enrolled with a 3% base pay contribution to your TSP. (You could raise or lower contribution or terminate individual contribution.)
* The military would match up to 5% of your contribution, after of 2 years of service.
* You would be vested in TSP after completion of 2 complete years of service, which means that you would have to complete at least 2 years service to get the government contribution.
3. Continuation Pay:
* At 12 years of service, active duty servicemembers who commit to 4 additional years would receive a bonus equal to 2.5 months basic pay.
* Services can increase continuation pay bonuses, if needed.
It is incorrect that those who join after January 1st, 2018 do not get a pension. You still get a pension under the military's new Blended Retirement System. Under the new system, you receive 40% of the average pay of your highest 36 months of basic pay salary. It used to be 50% for your pension at 20 years under the old system. You still have to reach 20 years at a bare minimum to receive the military's pension. Just wanted to make sure the facts are correct on here.
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