Investing 101: Understanding The Federal Thrift Savings Plan Retirement Fund

by Hank

In addition to their pension if they stay in the service for twenty or more years, members of the military have the same retirement savings plan, the Thrift Savings Plan also known as TSP, as civilian federal government workers and politicians.  The TSP is similar to a civilian 401k retirement plan that would be provided to workers at corporations like Coca-Cola, Wal-Mart, Microsoft, and the like.  The TSP offers a low cost, tax advantage way to save for retirement.

You can invest up to $16,500 in your TSP account in 2009.  Contributions in the TSP are made with before tax dollars.  You do not owe taxes on the funds and their earnings until you use them in retirement.  Contributions are automatically deducted from the military member’s paycheck every month and can be invested into any of the plan’s five index or five lifecycle mutual funds.  TSP offers index funds that track large indices such as the S&P 500 and the Wilshire 5,000.  There are also funds for international stocks, bonds, and government securities.  Or, an investor can put his or her money into a lifecycle fund which blends all of the index funds into a diversified portfolio with a risk tolerance based on the projected date of total retirement.

The money you contribute to the TSP is taken out of your paycheck before taxes are calculated, reducing the amount of your taxable pay.  So, if you were in the 25% tax bracket for example, and you earn $4,000 per month and decided to contribute $400 a month to your TSP account, your taxable income would only be $3,600 a month.  See the comparison chart below….

Without Investing In TSP

Investing In TSP

$4,000 x 25% tax = $3,000 take home pay ($4,000-400) $3,600 x 25% tax = $2,700 take home pay


While you take home more money without investing in TSP, you keep more money in your pocket/bank account if you invest in TSP ($2,700 + $400).  You don’t pay tax on your earnings (and contributions) until you withdraw your money. If you anticipate being in a lower tax bracket in retirement, this deferral is even more valuable.

Like most index funds, the TSP has some of the lowest fees around.  You can feel secure in the fact that less than 1% of the money you invest will go to the mutual fund companies that run the investment funds that TSP and the Thrift Board invest the federal employees’ money in.  Instead, 99.?% of your investments go towards buying the investments.  Less fees means more money in your pocket at the end of the year. 

After you leave the military service, you can roll the money you have invested and any earnings into a traditional IRA or another employer’s 401k plan where it can continue to grow tax deferred.  Or, you can pay an immediate, one time tax on the investment and reinvest the money into a Roth IRA where future earnings will grow tax free.

If you are a civilian federal government employee, your agency automatically contributes 1% of your basic pay to your account and matches the first 5% of your pay that you contribute to your account.  Make it a goal to contribute at least enough to get the full match.  That is like a 100% return on your money.  Where else are you going to get that?  Never leave free money on the table.

For more information on the federal Thrift Savings Plan, check out their website at

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