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Thrift Savings Plan

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The Thrift Savings Plan is a retirement savings program for military members and civilian federal employees. TSP is a tax-deferred fund, which means the money contributed to the account is deducted right away from the person’s taxable income, and the money in the fund isn’t taxed until it is withdrawn at retirement, usually after age 59 1/2, which is a significant tax reduction.

According to Army Maj. John Johnson, direction of the ARmed Forces Tax Council, more servicemembers need to take advantage of the Thrift Savings Plan, because it is an attractive investment option with unique benefits for military members.

“Certainly we’d like to see that participation rate go up, because it’s a great benefit,” Johnson said in an interview with the American Forces Press Service. “It’s important that everyone obviously be saving for their retirement in the first place, and if you’re going to be saving, the first place you want to put it is in tax-deferred or tax-exempt retirement accounts.”

Right now TSP draws participation from about half of the military.

“If you weren’t in the TSP or another tax-deferred account, every year, the income in that fund (would) get taxed,” he said. “If you look over your whole 40-year career, generally speaking, you’re going to pick up a couple hundred thousand dollars by contributing to a tax-deferred account as opposed to a taxed account.”

As of this year, military members are unlimited in the amount they can contribute to TSP. When the program was first made available to servicemembers in 2000, they could only contribute up to 5 percent of their income. Now the only limit is the Internal Revenue Service’s $15,000 per-year limit on contributions to tax-deferred accounts.

Deployed troops have different limits in TSP. Because their income is tax-exempt and the IRS has a separate limit for that category, they can contribute up to $44,000 per year, according to Johnson.

As another benefit to servicemembers, the Army is testing a program where the service matches soldiers’ contributions to TSP, Johnson said. This program only applies to new enlistees who fill critical specialties. The Army will match 5 percent of the pay the soldier contributes to TSP; the first 3 percent will be matched dollar for dollar, and the next 2 percent matched 50 cents on the dollar, he said.

Even for troops who have been in a while and won’t get their contributions matched, TSP is a good idea, Johnson said. A major benefit of the program is that the expenses on the accounts are very low – about one-tenth of the average private mutual fund. The money that in the private sector would be used to manage the fund, buy stocks and pay other fees goes straight to the servicemember’s bottom line in TSP, he said.

“You’ll have a hard time beating TSP,” he said.

TSP is not like a savings account, and the money contributed to it should be money that people aren’t going to need soon. However, TSP does have a loan program for situations such as a first home purchase, where participants can borrow money from their own account and then pay it back at a market interest rate.

After leaving the military, servicemembers cannot continue contributing to TSP unless they take a federal job. They can leave their money in TSP, though, and continue to draw returns on it. The money in TSP can also be rolled over to another IRA account.

Servicemembers can sign up for TSP online at www.tsp.gov. The Web site offers all the tools troops need to get started in the program and manage their accounts.

Above Information Courtesy of Department of Defense

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