Thrift Savings Program (TSP) and Roth IRA's
TSP Basic Facts:
- The TSP is a Qualified Retirement Account similar to a 401k or a traditional IRA
- Permanent open enrollment began on July 1, 2005
- You may invest up to IRS maximum limit of $18,000 per year
- The government does not match contributions on a Military TSP as it does for Federal Employees
- You have a choice of 6 funds:
- G Fund - Short-term U.S. treasury securities
- F Fund - Bond market index fund
- C Fund - Large company U.S. stock fund
- S Fund - Medium and small company index fund
- I Fund - International Stock Index Fun
- L Fund - Lifecycle Funds (Diversified among other 5 funds)
- All funds grow tax deferred, but are 100% taxable upon withdrawal
- Contributions are not counted as current year income
- Withdrawals prior to age 59 1/2 may be subject to 20% tax plus 10% penalty
- All loans taken from an active duty TSP account must be repaid
- Withdrawals and transfers are not allowed while on active duty
- A TSP may be transferred to a traditional IRA account after leaving military service without penalty or taxes
- A TSP may be transferred to a ROTH IRA after leaving service without penalty, but will incur a tax liability. The amount of the transfer will be considered income for the year the transfer was made.
- Upon withdrawal after age 59 1/2 every dollar is fully taxable as ordinary income. Any withdrawals made will count as income in the year withdrawn and could result in boosting you into a higher tax bracket. This combined with the fact that you loose many larger deductions at retirement time, means that you may or may not be in a lower tax bracket after retirement.
- You face a penalty if you don't withdraw enough funds from your account starting at age 70 1/2 (mandatory distribution).
- As of June 2012, some service members now may access a new ROTH IRA TSP option. Additional information may be found at www.tsp.gov.
TIP: If you have never contacted TSP or accessed your TSP account at www.tsp.gov, all of your contributions will default to the G Fund. This fund typically has the lowest return. To ensure good diversification, you should obtain a password for web access and carefully review your TSP account options.
Roth IRA Booklet
Roth IRA Basic Facts:
A traditional TSP can be an excellent part of your retirement plan, but does not represent the entire solution. Any good plan is based on DIVERSIFICATION. In addition to being diversified between fixed income (interest bearing) accounts and equity (mutual fund) accounts, you should be TAX diversified. You need the flexibility of having an additional source of funds to draw from that is TAX-FREE. When you are young, the best choice for TAX-FREE retirement income is a Roth IRA.
- Roth IRA Maximum annual after tax contributions per person:
- $6500 if over the age of 50
- TAX-FREE withdrawals after age 59 ½
- Withdraw contributions anytime
- Gains subject to 10% penalty and taxation prior to age 59 ½
- After 5 years penalty & tax free withdrawal can be made for 1st time home purchase ($10,000 max), disability, or death
- After 5 years a penalty free withdrawal can be made for qualified higher education expenses (Tax-Free withdrawals for higher education at any age can be obtained by establishing a 529 College Savings Plan )
- All contributions are made with after tax dollars. You forgo current tax deductions to avoid taxes on the ending values.
- There are NO mandatory distribution penalties at age 70 1/2.