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Maximizing Your TSP “Free Money”

2021-12-13

Your service to this country is admirable, as is the personal sacrifice you've made to join the Armed Forces. It's also given you the opportunity to take advantage of a great financial opportunity.

Are you aware that, if you joined the service after Jan 1, 2018, you are automatically enrolled in the Blended Retirement System and Thrift Saving Plan (TSP)? If you’re not maximizing the free money you could be getting through the TSP, you should be.

How do you claim it?

Your military service branch will match up to 5% of your pay. Three percent will match your contribution dollar for dollar, and the next 2% will be matched at 50 cents to the dollar. What does that mean? Here’s an example*:

E-1 Base pay is $1,785.00
3% of that = $53.55
That means the military will pay you $53.55

2% more of that = $35.70
That means the military will pay you an additional $17.85

Together, your free money totals $71.40 per month

So, if you can live without $89.25 a month (you’ll be putting it into your savings), in order to get an additional $71.40 for free, why not reward yourself?

Note: The Military will contribute 1% of your base pay to TSP — no matter what, even if you don’t put any of your own money in.

Next let’s talk Roth vs Traditional TSP

When you elect to put your money into the TSP, you will have to choose either a Traditional or Roth TSP, or a combination of both. You can contribute up to $19,500.00 to your TSP funds in total.

  • Roth — The money moves to your TSP after taxes have been taken out of your pay, meaning when you withdraw these funds at retirement you will not pay taxes.
  • Traditional — The money moves before taxes have been taken out of your pay, lowering your taxable income. But later when you withdraw these funds it will be taxed at whatever your tax bracket is at the time.

Related: Could an IRA Enhance Your Financial Future?  

Alternatively, you could put your money into an IRA retirement savings account similar to the TSP, but you could only contribute up to $6,000.00 annually, and there’s no match available to add to it. Taking advantage of the higher savings potential of your TSP is a smarter idea, with up to $13,500 more that you could ultimately claim.

How will your TSP savings grow?

The TSP offers six investment funds https://www.tsp.gov/funds-individual/ to help you build the right portfolio allocation. Your long-term career plans, your financial goals, and your risk tolerance level will impact your investment decisions. You can allocate your TSP savings into any combination of the following investment funds:

  1. Government Security Fund (G)
  2. Fixed Income Fund (F)
  3. Common Stock Fund (C)
  4. Small Cap Stock Fund (S)
  5. International Stock Fund (I)
  6. Lifecycle Fund (L)

The Federal Retirement Thrift Investment Board directly manages the G Fund — a lower-risk fund most similar to a cash investment. It buys government-guaranteed U.S. Treasury securities that provide interest income. The F, C, S and I Funds provide index fund options that come with varying levels of risk and return. Lastly, the L Fund invests in a combination of the five individual TSP Funds, according to your age and time to retirement.

While you will be working to be mission ready, it is also important to know how to make your finances mission ready too.

*Please note that the figures above are being shown as an example. This document is not meant to give tax or legal advice.