Commentary

January 11, 2013

Thrift Savings Plan: Traditional or Roth, bottom line is saving when it matters most

Air Force illustration by Tech. Sgt. Bennie J. Davis III

With the current military retirement system, Airmen must serve in the military for 20 years before reaping retirement benefits, unless they are medically retired before hitting that mark.

But what about Airmen who serve fewer than 20 years? What can they take away from their Air Force service beyond a medal, a handshake and solid work experience?

A Thrift Savings Plan is a retirement and savings plan originally designed for Federal Employee’s Retirement System employees and later became available to service members and employees of the older Civil Service Retirement System.

On Oct. 1, service members became eligible to take advantage of a Roth version of the Thrift Savings Plan, where money is deducted from taxed income, but becomes tax-free money when it is withdrawn.

According to TSP’s external affairs director, Kim Weaver, there’s a big difference between the two options.

“The biggest difference is that the traditional TSP is pre-taxed money, so it reduces the amount of your income in that year,” she said. “So let’s say your salary is $50,000 and you contribute $5,000 to traditional TSP. That money comes out before you pay taxes on it. You’re only paying taxes on $45,000, but, when you retire, or when you need the money, you pay taxes on what you withdraw then.

“The Roth TSP is just the opposite,” she explained. “The money coming into the Roth TSP is after-tax money.”

Contributors pay taxes before it is put in their account and as long as they follow two IRS rules, it will remain tax free, Weaver explained. Funds contributed must remain in the Roth TSP for five years and members must be 59 and a half before they can withdrawal their funds.

“All of the money that comes out is already taxed, so when that money is withdrawn at retirement, it is tax-free, which makes obviously a huge difference,” she explains. “Then the question becomes, ‘Do I think I’m going to pay higher taxes now or higher taxes later and is it going to help me to defer income now or is it ok to pay taxes going into the Roth TSP?”

Federal employees can use the contribution comparison calculator on www.tsp.gov to help them determine which plan is right for them. The maximum contribution this year will be $17,500.

Although Federal Employees must sign up for TSP, Weaver explained that Airmen can take advantage of TSP from day one of their enlistment. It is done through the Defense Finance and Accounting Service.

While most look at TSP as a roadmap to a comfortable retirement, Weaver said that enrolling in thrift savings, even for one or two enlistments, can pay real dividends.

“They can either leave it in their TSP untouched, move the money around within the funds or leave it in until they are ready to retire,” Weaver said. “They can also roll it over into another 401k plan in the private sector if they choose to do that. So, just because service members leave the military, it doesn’t mean they are forfeiting their money. Once they contribute their money, the TSP belongs to the participant.”

One bit of caution. There can be large tax consequences for Airmen who simply pull their money out without any type of rollover into another account.

TSP officials also confirm the adage that the ‘early bird gets the worm,’ or in the case of TSP, the dividends. For example, two Airmen join the military at the same time. One Airman decides to immediately put away five percent of her pay for 20 years while the other Airman decides to invest 10 percent of his pay for his last 10 years of service.

Which service member would accumulate more money over time? Is it the Airman who started saving as soon as she joined, setting aside a smaller percentage, or the Airman who started saving 10 years later, but doubled his contribution for the remainder of his career?

The Airman who chose to contribute five percent from day one is the winner. This Airman ended up saving more overall due to compound interest that accumulated over a longer period of time. This despite the fact that the other Airman saved doubled the amount of his pay for 10 years.

The Airman who started contributing as soon as she joined would have a total estimated TSP account balance of $95,133 while the other Airman who waited would have a total estimate TSP account balance of $51,325. The difference is almost double.

“If you get an early start and put in just a little bit of money into either the traditional or Roth TSP, you are going to do yourself a big favor for that time when you are ready to retire.”

For more information on the Thrift Savings Plan, go to www.tsp.gov or check out the following link: www.youtube.com/user/tsp4gov.

 




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