I've been asked to write a post about the Thrift Savings Plan (TSP), so this will be a bit of a back to basics post for those who are eligible for it. This was originally written in 2017, but updated now for 2020.
The Thrift Savings Plan is basically the 401(k) for federal employees including military members. There is no profit-sharing component to it, so the employee is generally limited to a $19,500 per year employee contribution ($26,000 per year if 50 or over) plus any match she may qualify for.
Roth Option in the Thrift Savings Plan
When I was in the military, there was no Roth TSP option, but there now is. While most people should probably use a tax-deferred option instead of a Roth option during their peak earnings years, that is not the case for most TSP-eligible folks. Those in the military are probably in a ridiculously low tax bracket (thanks to low pay, probably no state taxes, and a large percentage of their income from non-taxable allowances and tax-exempt war zone pay) now, so they should generally use the Roth option. In addition, many military and federal workers will have a pension in retirement and the more taxable income you will have in retirement filling the brackets, the better Roth retirement account contributions become.
TSP Match
Non-military members have received a TSP match for a long-time, but military members starting in 2018 also receive a match on up to 5% of base pay. That's part of your salary, don't leave it on the table. With the new “blended retirement system” (automatic for those entering the military after Jan 1, 2018, and optional for those already in the military) military members will get the same match as federal workers along with significant changes to the pension system. Those changes are much better for those who don't stay in 20 years since the pension previously had “cliff vesting” and the Thrift Savings Plan had no match.
Why The Thrift Savings Plan Rocks
The TSP may be the best 401(k) in the country. It has rock bottom expense ratios (people are literally complaining that the ERs have gone up in recent years from 2.5 basis points to 4.1 basis points), broadly diversified index funds, and simple “Lifecycle” (like Vanguard Target Retirement) funds. In addition, it has the unique G Fund, which offers treasury bond yields with the safety of a treasury money market fund. I've written about that free lunch before. There are no additional fees.
The TSP is such a great 401(k), that savvy folks don't roll their money out of it when they leave the military. Instead, they keep it open and roll money into it at every opportunity.
The TSP Funds
There are five basic funds in the TSP:
- C (“Common Stock”) Fund: Basically a very low-cost S&P 500 index fund
- S (“Small Stock”) Fund: An extended market index fund, mostly mid-caps despite the name
- I (International Stock) Fund: A developed market index fund- Europe and Pacific, but no emerging markets (a recent change to add them was squashed due to concerns about the government endorsing the investment of money into Chinese companies)
- F (Fixed Income) Fund: A total bond market index fund
- G (Government Securities) Fund: A unique fund similar to a stable value fund, but backed by the US government instead of an insurance company. As of Dec 2019, it was paying 1.875%. Not awesome, but better than the Vanguard Prime MMF paying 1.71% and the Vanguard Intermediate Treasury Fund paying 1.74%.
In addition to these basic funds, there are also LifeCycle Funds, one for every ten years. The idea is that you pick your retirement date and put all your money in that fund. The asset allocations of these funds in May 2017 were:
- L (LifeCycle) Income: 11% C, 3% S, 6% I, 6% F, and 74% G
- L (LifeCycle) 2020: 22% C, 6% S, 12% I, 6% F, and 54% G
- L (LifeCycle) 2030: 34% C, 10% S, 19% I, 6% F, 31% G
- L (LifeCycle) 2040: 39% C, 12% S, 22% I, 6% F, 21% G
- L (LifeCycle) 2050: 44% C, 14% S, 25% I, 5% F, 12% G
Like with any retirement date fund, you should pick your fund by the desired asset allocation, rather than the date. Bear in mind these asset allocations are significantly less aggressive than what Vanguard puts in their Target Retirement funds. That's not necessarily good or bad, just different so be aware of that.
Thrift Savings Plan Tax-exempt Contributions
Military members can contribute additional money (usually $57K – the $19.5K employee contribution minus any match received) in after-tax money into the TSP while they are deployed. This is not necessarily the best move given that earnings on that money remains tax-deferred. But if you can figure out a way to get that tax-exempt money into a Roth account, then it is a great idea. Unfortunately, in-plan conversions are not currently allowed.
The Downsides of the TSP
The TSP has been legitimately criticized as well (and for more than just raising ERs by 1 basis point.) Here are the problems I see with the TSP:
# 1 S&P 500 instead of Total Stock Market
Total stock market (TSM) funds are slightly better than S&P 500 funds. Not only are they more diversified, but nobody can front-run them. Together with the inclusion of theoretically higher returning small stocks, TSM should have slightly higher returns.
# 2 No True Small Stock Fund
An extended market fund is a poor substitution for a small stock fund. It's 53% mid-caps according to the Morningstar Instant X-Ray Tool. Of course, that's not all that different from the Vanguard small cap index fund which is now up to 59% mid-caps! If you want a small-cap fund that is mostly small caps on a Morningstar X-ray you pretty much have to buy a microcap fund. But it demonstrates the importance of looking under the hood before you buy.
# 3 Simplicity vs Diversification
The TSP is traditionally very slow to add any additional asset classes. So one big criticism that many have of it is that you can't buy Emerging Market Stocks, Foreign Bonds, REITs, TIPS, Small Value funds, Gold, etc. Again, that's not necessarily a bad thing since simplicity helps lots of people avoid dumb mistakes AND keeps costs low. But it forces asset class junkies like myself to build around what the TSP has using Roth IRAs or a taxable account.
# 4 Only One Partial Withdrawal
For a long time, the biggest problems with the TSP, aside from the fact that you have to deal with government bureaucracy and military finance offices when using it, were all related to getting your money out of the account. For example, you could only do one partial withdrawal from the TSP IN YOUR ENTIRE LIFE! I'm not talking about while you're employed (you can't do one then). I'm talking about after you separate from service. I had to use mine to get my tax-exempt money out into a Roth IRA. But the next time I want to roll money out of the TSP, I would have had to take it all out. They would let you do as many rollovers into the TSP as you like, but it was a lot harder to get your money out.
Thankfully, this has dramatically improved since I wrote this post. There are both hardship-based and age-based in-service withdrawals, but more importantly, a lot more options for when you leave federal service.
# 5 Limited Distribution Options
Speaking of getting your money out, another big issue is when it comes time to spend your money in retirement. You used to have just five options:
- Leave the money in the TSP and just take your RMDs.
- Take it all out- either pull it out and pay the taxes (and possibly penalties) on it and put it in a taxable account or roll the entire thing into an IRA or 401(k).
- Take out a specific dollar amount every month until the money is gone. This amount must be at least $25.
- Take out an amount each month calculated based on your life expectancy. This is not technically an annuity (i.e. no guarantee the payments won't go down over time with poor investment performance) and the amount you get is recalculated each year.
- Annuitize the account. The annuity can be single, joint, with 100% or 50% to the survivor, and can be flat payments or indexed to inflation.
You could also do various combinations of the last four options. i.e. you could annuitize half of it and roll the other half into an IRA.
But now you can also take out “single withdrawals” of $1,000 or more as often as you like. This is much more like a typical IRA or 401(k).
# 6 No Mega Backdoor Roth IRA Option
There are no real in-service withdrawal or in-plan conversion options and the only time you can put in after-tax money is while deployed. Most 401(k)s don't offer these, but some do!
Loans and Hardship Withdrawals
Like many 401(k)s, the TSP also offers loans and hardship withdrawals. Obviously, try not to. Neither are great options for extra cash. Loans must be repaid upon separation (or it triggers taxes and penalties) and hardship withdrawals may still cause penalties to be assessed (along with the expected taxes.) Either way, it's certainly going to impede the long-term growth of the account.
Summary
In summary, the Thrift Savings Plan is a great 401(k) and you should feel lucky to have access to it. It does, however, have a few quirks you should be aware of. Hopefully, it will continue to improve as the years go by.
What do you think? Do you have access to the TSP? How do you use it and why? What do you like and dislike about it? Comment below!
Don’t forget for the new folks or those who opt for the blended system there is TSP matching now: http://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/BRS%20Frequently%20Asked%20Questions%205.01.2017.pdf?ver=2017-05-02-095830-163
That’s great news (at least that part of the changes made.)
You can take a partial withdrawal while employed, but then you can’t take another one when you retire. They are trying to change that. I’m retired and I’m hoping the changes get passed.
But you can always roll money in there. You just only get one partial withdrawal, i.e. can only roll money out once, even after separation. The withdrawal options are actually one of the worst parts about the TSP in my opinion.
Thanks for the link, Jody. In reading through that it appears like the new BRS is a good deal. Up to 5% match. My question is, what is the catch? Or what does the government require? There’s rarely a free lunch and I didn’t see anything about what the government gets from you in exchange for offering this retirement match system.
I saw the defined benefit goes from 2.5% to 2% if you go into the BRS, but if you don’t plan to be a lifer that doesn’t matter. The match would seem to be much more beneficial for a short timer, unless enrolling commits you to more time somehow. Is there anything in the fine print with regards to this?
There is no doubt that the new Blended Retirement System (BRS) is a win for the people who know they are going to get out of the military before they are eligible for retirement. As you mention, for those who know they will stay in it is probably a better deal to stick with the current system and take the higher multiple (2.5% on the current system vs 2% for the new BRS) on the government guaranteed and inflation-adjusted pension.
For the people in the middle who are not sure if they’ll stick around long enough for a retirement, I lean toward taking the BRS. Only 20% or less of people stay around for 20 years and earn the retirement pension, so the odds don’t favor that you’ll stick around. And if you leave before 20 years, the only way to talk away with any government contributions is to take the BRS.
We created a BRS resource center with all sorts of things to help you out when making this decision, including various articles/opinions about the system, FAQs, and calculators that can be seen here:
link no longer available
The catch and what the government requires is that you have to work for the government. Isn’t that enough?
But yes, I agree, those who aren’t lifers benefit most from changes like this.
The catch is that the members now have to take more responsibility for their retirement. For those not staying 20 years its great because something is better than nothing. That being said if you have ever been on a military base most of our young active duty drive nicer vehicles than the senior officers do so I doubt they are putting much into the TSP. Unfortunately education about this is mixed in with the thousands of other annual trainings that the military lumps on its members. When I polled my young sailors on what fund they were using in the TSP I got a very confused look (most didn’t know there were different funds). I try to educate them and show them the “power” of compound interest and get them excited about taking some interest in their finances.
I would be interested to see the math to see if the government is actually losing money. If matching what I am guessing in general are probably low contributions from a majority of its members will cost more than the decrease in pension (old=50% base pay yearly with retirement at 20 years and 75% base pay with 30 years service vs new 40% base pay yearly at 20 years and 60% at 30 years of service). Especially considering some members retire with 20 years service at age 38. If they live to 88 that is 50 years that the government is paying that pension!
We tend to gloss over how significant the drawbacks of inferior investment options are. Let’s consider a well diversified, global small/value allocation using DFA funds compared to Total and Extended Market Vanguard funds. Over the last 20 years, you’ve seen DOUBLE the growth in the former compared to the latter: http://bit.ly/2vZcOuw
I also worry, if left to their own devices, if TSP investors are both (a) adopting an appropriate growth-oriented (mostly stock) allocation given their multi-decade horizons and (b) are able to stay the course? We know the news on (b) might not be good — investors in Vanguard’s Lifestrategy funds (simpliar to the Target Date options) have lost -0.9% a year over the last decade due to bad behavior…a significant cost that doesn’t show up in expense ratios.
First, you’re comparing apples to oranges. Holding more small/value stocks is riskier so you would expect higher long term returns from holding that allocation than a total market allocation such as combination of the TSP C/S funds.
Second, you’re always touting DFA funds as generally superior, but that general superiority is not clear to me either in the data or in my personal experience investing in Vanguard and DFA funds head to head in a very limited way.
I invested the same % of 529s into the Vanguard SV Fund and the DFA SV Fund at the same time and have held it since. The results so far? VG 8.05% and DFA 5.25% annualized.
And we haven’t even considered the cost that most pay to get DFA access- hiring an advisor.
I don’t mind you being a DFA super-fan (I like them too), but I think it’s probably appropriate for you, when making comments like the above, to let readers know that you make your living by selling access to DFA funds (among other services.) I think it’s also appropriate to acknowledge there are many roads to Dublin and any reasonable investing strategy combined with reasonable goals, a solid savings rate, and good investing behavior is likely to lead to success.
How does one roll $$ Into the TSP after separation?
You can read about it here:
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/RolloversTransfers/methods.html
https://www.tsp.gov/PDF/formspubs/tsp-60.pdf
Good post! I have been invested in it for 24 years now. i have stayed the course with my asset allocation and I am satisfied with it’s performance. Agree with you about the increase in cost, I was not very happy. I also agree with you about the lack of diversification. But on the other side. No one explains the TSP to new employees, so keeping it simple is probably best. In my case, I like to read and invest. It is of no surprise that few employees including doctors maximize their TSP. Upon request I gave a tutorial about investing covering the benefits of compounding, how much to contribute, asset allocation and the TSP and i was not surprised with the lack of knowledge.
One question; I have seen many proxies for the TSP funds. Which do you consider the most reliable?
White Coat Investor: Would you please consider a column on what factors a military member should use in deciding whether to opt for the new blended plan. Please consider a link to your blog post on the Bogleheads site which has military followers.
I’m not in the military myself, but want the best for our service members. Thank You!
Unfortunately, I cannot post links to my website on the Bogleheads forum. I would love it if you (or other readers) would do so when you think something I write is worth sharing.
I agree that would make a good post. I would certainly welcome a guest post on the topic, which would save me a lot of research.
Direct your military friends to Doug “Nords” Nordman’s blog.
Excellent info, no sales pitch, military specific.
http://the-military-guide.com/
Unfortunately the opt-in period for the BRS ended 31DEC18. If one was in the military prior and did not opt in then it is now too late.
Awesome post!!!
One addition – when a person joins the military, TSP is one of many papers shoved under their nose that they are told to sign. It’s great (IMHO) that it becomes automatic, BUT the new recruit is automatically put 100% into the G fund – which many of us would say is far too conservative for a young person.
I’m hoping they will at least move to auto-enroll into one of the LifeCycle funds (which are also pretty/too conservative for a young person)…
Also, if you haven’t bothered to look at your TSP allocation, please use this great article as a spur to make sure you are in the funds that fit you!!!
As you can read here, they auto-invest into the Lifecycle funds for civilians now, but not the military. We still get the G-fund automatically, which is a shame:
If you are a civilian and you were enrolled on or after September 5, 2015, then unless you choose another investment option, all contributions received by the TSP will be deposited into the Lifecycle (L) Fund targeted most closely to the year you turn 62.*
If you are a member of the uniformed services or you are a civilian who enrolled before September 5, 2015, then until you choose another investment option, all contributions to your account will be deposited into the Government Securities Investment (G) Fund.
(Source: https://www.tsp.gov/PlanParticipation/AccountManagement/index.html)
WCI has repeatedly reminded me to consider rolling some of our retirement funds into the TSP. But for a lazy investor like me, is it really worth it? With the restrictions on fund type and withdrawal options, and us being in our 50s, please tell me not to bother! Currently in Vanguard Admiral funds with pretty low fees- 0.04-0.4% , and slowly converting to Roth and more index as tax bracket permits.
As long as your alternative is something as low-cost as the Vanguard Admiral funds, I agree that it is probably not worth it to use the TSP. While the TSP’s limited options are adequate, you have much more selection of investments at Vanguard, Schwab, Fidelity, etc. You just need to make sure you are in funds that can compete with the TSP’s low costs, and with the recent price war among these companies that is becoming easier.
I was never in the military but I did spend a decade working for NOAA and during that time maxed out my TSP. Back then (mid-90s to mid-2000s) I was young and chafed at the plain jane investment options compared to the high-flying Janus tech funds I had my personal IRAs invested in.
Janus crashed and burned but my TSP did OK during the tech bust and 9/11 downturns. I still didn’t really know how good I had it until I started reading bogleheads and learned about the wisdom of index funds and low fee investing.
I left Federal service 15 years ago but I still keep my TSP active and have rolled all my old IRAs into the TSP. In addition, every time I leave a job I roll whatever 401(k) or 403(b) funds I have accumulated into the TSP. I could, of course, roll them into a Vanguard IRA but maintaining all my legacy funds in the TSP frees me up for doing back-door Roth conversions.
As for the upstream question on how to roll funds into the TSP after you have left Federal service. It’s pretty simple. You just download the appropriate form from the TSP web site (form TSP-60 I believe) and send it off to your current 401(k) or IRA account manager. It’s old-school paperwork through the mail but eventually goes through. The only thing you can’t do after you have left Federal service is continue payroll deductions or do TSP loans. But you can keep rolling over IRAs and any eligible 401(k) type plans to keep growing your TSP.
What are the thoughts on the international fund option? It has gotten a lot of bad press lately for not covering emerging markets or mid and small cap.
It’s the cheapest broad based international index fund I know of. It’s pretty easy to add Vanguard Small International and Vanguard Emerging Markets Fund to round it out. That’s what I did when it was a big part of my portfolio.
Just a heads-up, it appears the I fund will be transitioning to track the MSCI All Country World Index in the next year or two. This means we’ll get Canada, emerging market and small international. see http://www.fedweek.com/fedweek/tsp-change-fund-index-leave-others/
That’s an excellent change and one I’m happy to see. Although my entire TSP is now G fund since I haven’t been able to contribute to it for years. It’s now only 10% of my portfolio.
Correct me if I’m wrong, but if you’re a recent federal hire, do you not have to enroll in FERS as well? Which is essentially a second social security tax, of 4.4% which goes toward your FERS retirement annuity. TSP being pretty decent takes the edge off but I don’t think many people are excited about having to sign up for a second social security tax.
FERS used to be a decent deal when you only had to contribute 0.8%, or when they had CSRS, etc., but now with the 4.4% mandatory contribution, the federal annuity isn’t even a benefit, it’s a forced annuity. And for most people who aren’t physicians, maxing out their TSP after already being hit for social security and FERS is going to be tough.
It’s tough for most people just to max out a 401(k) and a Roth IRA. I mean, if you’re under 50 that’s $18K + $5.5K- $23.5K. If you’re only making $50K (or even $100K) that takes a pretty good savings rate.
Given the FERS statement above. Is it no longer worth doing a government service job for the pension. I am planning on getting out of the military, buy back my 7 years into FERS do 5 as GS then call it quits hitting 12% at some old age I get to collect. Looking for anyone’s opinion. I didn’t know the FERS is now a bad deal
Not sure what statement you’re referring to, but I’d run the numbers and make a decision based on that.
You can’t opt out of FERS.
https://www.opm.gov/faqs/QA.aspx?fid=735eda40-61a8-45df-b6ad-47185f4c91a5&pid=afb989ce-f128-416b-83a1-c9990034a0fb
Correction: the match for FERS employees is only 100% for the first 3%, then 50% match on the next 2%, similar to the test system you describe the Army had at one point.
https://www.tsp.gov/PDF/formspubs/tspbk08.pdf
You are right in that they match 4% (Dollar for dollar on first 3% and fifty cents on the dollar for the next 2%). But you also get an automatic 1% regardless. So the total is still 5% of your base pay.
Please correct me if I am wrong. My understanding is that withdrawals are indeed limited from TSP.
But my reading is that:
you can do monthly withdrawals — and you can adjust that monthly amount once a year.
So in year A I take the minimum monthly’s, while in year B I take a huge fraction of the total – almost a separate large lump sum withdrawal. Then go back to minimum withdrawals.
I think that’s allowed.
It is also possible to take an in-service withdrawal once you’ve reached 59.5 if still employed although I believe it counts as your one partial withdrawal.
I pre-date the TSP, so when I joined your retirement options were to stay 20 years or set up your own IRA (even Roths didn’t exist) and other investment accounts. Kind of crummy, but it actually worked for us. By “forcing” us (husband also military) to load our own accounts, we reached financial independence by 40 years old living off of one military income and saving the other. (I can quit working at anytime because i’m not dependent on accounts which are tied up until age 59 1/2). Meanwhile, when TSP kicked in while I was still active duty I just additionally maxed that out. I agree, the plan fees and expense ratios are essentially nil for the TSP (vs what I pay now for my 401K). So my TSP is just parked now for many many years and I plan to roll my current employer 401K, 403b and governmental 457b eventually.
You know you can get retirement money penalty free before 59 1/2, right?
https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
Yes. Living off dividend income generated from my taxable account. Probably plan never to divest anything until we are forced with RMD.
White Coat Investor: New to the website here and I am greatly appreciating all the wonderful information you have shared with the community!
Question (possibly a stupid one but hard to find a firm answer of my exact situation online) regarding the TSP specific to members of the Army reserves. I just recently commissioned to the USAR. My civilian employment is W-2 based but they offer no 401k/retirement plan so I have been using a traditional IRA (and maxing it out) for the time being. At this point in time I am not very investment savvy, but working to improve.
My initial thought was to contribute 100% of my drill-pay to the TSP every year as a nice start; but would I also be able to directly contribute money earned from my civilian position to max-out the $18k annual limits (then have this portion of the contribution deducted from my tax burden when I filed taxes at the end of the year), or would I have to contribute to an IRA and then continue to roll it over into the TSP every year?
Any other tips regarding this system for reservists that might be of help for this sort of situation? Thanks!!
No. You can only contribute money earned in the reserves into the TSP. Sorry.
Be aware you may also lose the ability to deduct the IRA, depending on your income, but certainly for most readers of this site.
WCI awesome post! Army resident here. I’ve been combing the internet to confirm that the growth of the tax exempt contributions after the 18k into a Roth is indeed taxable (regarding those funds during deployment). Do you have a source? You are the first I’ve seen say this (and is the opposite of what I’ve heard the military financial people say) and I’d love to confirm this. I prefer not to get blind sided by this years down the road.
Thanks for your help!
It’s only taxable upon withdrawal, not immediately. The earnings of tax-exempt dollars inside a retirement account are tax-deferred. So the ideal thing to do when you separate is isolate your basis and convert those tax-exempt dollars to Roth dollars.
Haven’t you learned not to trust anything military financial people say yet? (My FIL retired as an O-6 in finances, and he’d agree!)
4tun81 we never did a Roth TSP- only roth iras outside- so I knew the military untaxed combat pay put into husband’s regular TSP was the only part untaxable on removal, not the earnings on that amount. In his TSP it is all together, I just keep a careful record of the tax free amount and hope/expect the IRS will accept that figure in 20-40 years when we draw it out (better make sure to keep all his pay records, and comment on that in our estate plan in case I die before that money comes out). However WCI I would think that any amount they put into a Roth, the earnings are ROth earnings and also never taxable on withdrawal- that the $18K is the same whether one elects to pay taxes outside the account (“Put $18K in Roth but don’t subtract it from my taxable income on my W-2”) or puts $18K of untaxable combat pay in the Roth. I think WCI misunderstood here? If you meant 4tun81 that you put the $18K into a Roth TSP account?
Right. Roth earnings are never taxable on withdrawal. When I had tax-exempt money in my TSP, the TSP kept track of it. Is it not doing that for you? It should tell you what is tax-deferred, what is tax-exempt, and what is Roth on the site or a statement or something. I went looking for mine (because I’ve still got $50 or so of tax-exempt money in there) and all I can find is a line on the annual statement that tells me how much of my TSP contributions were tax-exempt. In my case, I contributed $79K of tax-deferred dollars and $26K of tax-exempt dollars. Not sure the TSP is actually keeping track of how much of what is in there now is tax-exempt. I have it somewhere though. In fact when I isolated the basis in mine, I left $200 in the account. 79+26=105 26/105= 25%. 25% * $200 = $50. So $50 is tax-exempt now.
Here’s a definitive link from the TSP about the taxes on tax-exempt contributions by the way: https://www.tsp.gov/PlanParticipation/BeneficiaryParticipants/withdrawalsbp/taxes.html#tax-exempt
Thanks, next time I scour the TSP accounts I’ll see if I can find any such listing. I wasn’t looking before!
Thanks, next time I scour the TSP accounts I’ll see if I can find any such listing of the nontaxable amount. I wasn’t looking before!
So 72(t) SEPP withdrawals are not an option with the TSP?
I don’t think so. Very limited withdrawal options. You could always roll it to an IRA and do that of course.
Regarding a transfer or partial withdrawal after you have left military service… does the Individual Ready Reserve count as leaving?
I am being involuntarily separated from the military, and as a condition of my severance pay I have to stay in the IRR for 3 years. I doubt anybody in DoD is actually keeping track of this, but that’s the rule anyways. I will be attending graduate school after I leave, and will have essentially $0 income. This is a great time to do a traditional -> Roth conversion. My intent is to do a partial withdrawal (all but $201) of my 3 piles of money (tax-deferred, tax exempt, and Roth) in order to get the tax-exempt money from my time in a CZTE into a Roth, and to convert Traditional to Roth due to low tax bracket.
Yes, I think so.
Regarding TSP LOANS- is it always generally a ‘bad idea’?
Scenario:
Couple, 1 active duty (@year 15, goal of 20+ yrs of service and thus retirement benefits), 1 civilian government physician employee. Both maxing out TSPs and Roth IRAs x 2 years, both ~age 40. Bad idea to take a ‘Residential loan’ out of TSP for a house down payment to meet 20%? First time home-buyers. From my novice understanding, the interest accumulated during the TSP loan (G Fund rate) + the loan amount itself, is paid back into our TSP accounts, and the TSP Residential loan has a max of 15 year repayment.
I understand that the time the money is kept out of the TSP is not gaining returns (sacrificed earnings). Although considering the 10 year compound return of even the C and S fund (7.00% and 8.13% resp.), my question is- why should we not ‘borrow’ from our TSPs and/or Roth IRAs to increase our down payment (given that we are counting on 1 of us having 20 yrs of service and retirement pay in 5 or so years).
Down payment will be combined with some cash, and either:
VA home loan
vs. a physician mortgage loan
vs. a conventional mortgage loan
TSP loan: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/loans/index.html
WCI Doctor Mortgage Loan: https://www.whitecoatinvestor.com/personal-finance/the-doctor-mortgage-loan/
WCI- TY for ALL of your insights and sharing them with US!
It’s always generally a bad idea, but that doesn’t mean it’s always the worst option! 401(k)/TSP loans actually became more attractive with the new tax bill given that you have a lot more time to pay them back after separating from the employer.
So here you’re weighing six ideas:
1) Borrow from the TSP for a down payment
2) Take money out of the Roth IRAs for a down payment ($10K of earnings is tax and penalty and principle can always be withdrawn)
3) Buy a home without a down payment (usually with a doctor loan)
4) Buy a home without a down payment using a VA laon
5) Wait to buy the home until you can save up a down payment
6) Don’t buy the home at all
I generally think buying a home on active duty is bad idea, so I’d lean toward 6. But if you’re set on buying it, I think I’d go with # 3. # 1 would probably come after that for me. Good luck with your decision.
WCI,
Question along the same line and think I have been following the site long enough I probably know what your response will be. I’m in the Navy and moving back to an area where I have been before and already own a house (VA loan). I have an excellent property manager and after their 10% its still a good cash flow property. Being a military town the longest it has been unrented in 6 years is 2 weeks and rent is much higher than mortgage. I funneled all extra cash last year into the bull market (maxed tax protected first and than brokerage accounts) leaving just my 3 month emergency fund. I wasn’t planning on moving but now that I know I am my options would are:
1.)Save a traditional 20% down payment between now July when I am looking at buying (looking at homes 250-300K) but maybe not being able to fully fund all tax protected accounts.
2.)Do a second tier VA loan. Don’t have to pay PMI but do have a 3% funding fee which does not go to the principle so $7500-$9000 to be able to use the VA loan.
Since I will most likely be moving in 3 years again I would turn the house into a rental property with my same property management company to turn it into an income property.
I have seen some blog posts that have discussed similar topics but none discussing VA loans.
Interested to hear your and your readers thoughts. Thanks for the Great site!!
–NavyDoc
Why are you buying a house you know you’ll be leaving in 3 more years? Do you enjoy long distance landlording or something? Have you considered renting or moving into the rental you already own in that town? If you lived in it a while you could sell it without having to pay taxes on the gains. Those rules recently changed, so look them up. It used to be 2 years but I think it’s more now.
I’m skeptical that a house bought on a VA loan (minimal down payment) will be cash flow positive. It’s not impossible, especially if you buy at a low enough price, but seems unlikely.
I’m not a big fan of VA loans. I’d probably do a doctor loan before I did that. I don’t really think we’re doing our service members a favor offering that particular product. Dave Ramsey also not a big fan of that loan. Why would you use that over a doctor loan? Did you actually compare them side by side?
If one is in the national guard and owns a private practice, could they max out a TSP at 18.5K and than max out a employer contributions 401K at 55K (assuming I pay myself enough net income). Wasn’t sure if they would be limited to only 36.5K in the 401K. Thanks
Depends on the employer plan. IRS rules say yes, you can do it, but the plan might not allow it.
I just separated from the Army (internist) this summer, and am starting at the VA to work part-time. HR said I had an option of starting a new TSP account, or contributing to the one I still have? Is there a benefit either way? Another account just seems like making things unnecessarily complicated!
Also – I read through the post, but overall it sounds like you recommend just picking the LifeCycle # that correlates with targeted retirement? Thanks!
Now that you have separated, you’d likely get a separate TSP account that is civilian. While you can continue to manage your military TSP account, you can’t contribute to it anymore. I don’t think there is any other way to do it.
If you want to hit the easy button, the Lifecycle funds are the way to go. You can read about that here:
http://www.militarymillions.com/2018/01/29/the-easiest-way-to-figure-out-your-optimal-tsp-investment-plan/
If you want to read a little bit more and consider non-L fund options, I’d read my TSP guide:
http://www.militarymillions.com/tsp-guide/
If that doesn’t answer your questions, let me know.
Good point. Moving military to civilian you do have to open a separate account I believe. But if they didn’t require it, I wouldn’t.
I’d use the old one to keep it simple. I’m not necessarily against Life Cycle funds but I generally advocate looking at all your retirement accounts as one big account and it’s tough to do that AND use target retirement/lifecycle funds in any one account.
https://www.whitecoatinvestor.com/7-reasons-i-dont-use-target-retirement-funds/
Thanks for the feedback! Love your blog, book and podcast. I have been learning so much (and that I have so much more to learn!)
Does lack of ERISA protection matter? I have accounts at Fidelity and other brokerages that are ERISA protected. How important is ERISA protection? I’d like to consolidate all my accounts at TSP, but don’t know whether to do so because TSP isn’t ERISA protected. Thank you!
Only 401(k)s and similar plans are ERISA protected. I don’t know the specifics of the TSP in regards to this, but it seems highly likely that you have more ERISA protection in the TSP than in IRAs and taxable accounts at Fidelity.
Thank you!
I have a 401(k) at Fidelity which is ERISA protected.
TSP isn’t ERISA protected, but is from creditors in case of bankruptcy. TSP said TSP isn’t protected from lawsuits.
Here’s what I found online:
https://www.tsp.gov/PDF/formspubs/oc95-10-b.pdf
How are funds in my TSP account affected by a bankruptcy? The TSP is a retirement savings plan for Federal employees and members of the uniformed services. It is similar to retirement plans authorized under section 401(k) of the Internal Revenue Code. (See 5 U.S.C. §§ 8351, 8401-79.) The funds in your account are held in trust for you by the TSP and are protected from the claims of creditors by a law which provides that the funds “may not be assigned or alienated and are not subject to execution, levy, attachment, garnishment, or other legal process.” (See 5 U.S.C. §§ 8437(e)(g).) This provision is enforce-able in a bankruptcy action by virtue of 11 U.S.C. § 541(c)(2). Consequently, your TSP account cannot be made a part of your bankruptcy estate.
https://www.irs.gov/pub/irs-wd/0041029.pdf
Like ERISA-qualified plans, TSP accounts are generally protected from alienation provision. Funds held in the Thrift Savings Fund “may not be assigned or alienated and are not subject to execution, levy attachment, garnishment or other legal process.” 5 U.S.C. § 8437(e)(2).
https://www.tsp.gov/LifeEvents/personal/index.html
Bankruptcy
The funds in your TSP account are held in trust for you by the TSP and, by law, are protected from the claims of creditors. Your TSP account cannot be garnished to pay debts.
Thanks!
Maybe time to update this since #4 and #5 are no longer true. I think this made TSP even better. Also, maybe you could talk about when you would put money into TSP (not talking about your earning). I believe you can transfer money from an Traditional IRA or Roth 401K (not Roth IRA) or 401K held somewhere else into TSP.’
Heading towards retirement after 28 years of AD and I thank you for the part you played in getting me here and in making me smarter about what to do in retirement. Amazing stuff Jim – thanks!
I’ll suggest it to Jill who manages updates like that.
Yes, you can certainly roll money into the TSP, even after separation. I have done it 3 or 4 times over the years.
Thanks and Happy Thanksgiving!