All members of the military should understand what a Thrift Savings Plan or TSP is. This post will help you understand one of the most important funds that can set up your financial future. To be more specific, your TSP can be a great ally in your ability to enjoy retirement in the future.
What is a Thrift Savings Plan?
Simply put, the TSP is a retirement savings plan that is meant to be used by retired and current federal civil service employees. This was formed through the Federal Employee’s Retirement System Act of 1986. This is basically the same with what the private sector has in the form of a 401(k).
A TSP is considered to be more challenging because most military personnel and families do not understand it. To maximize the TSP, you need to grasp its basic concept including the type of funds available under the program.
Six types of TSP funds
To help you understand the program better, you need to get to know the 6 types of funds under a Thrift Savings Plan account.
This is the Government security fund. It is considered to be the safest type because it is a government-backed fund. The bond issued by the US government can be in the form of treasury bills and notes and savings bonds.
This is the Fixed-income fund – a great option if you prefer a fixed payment that is on schedule. The fund pays out a return based on a fixed schedule and can include money market funds and exchange traded fund among others.
The Common stock fund is a type of fund where you put your money in various publicly traded companies. You get to own shares of corporations though you do not get any guaranteed dividends, creditor status or any other types of special privileges. If these companies perform well and grow in value, your TSP will grow too.
This is the Small cap stock fund. Simply put, these types of funds focus on low-valuation investments which basically has the potential to grow and become big cap stocks. If the company increases in value, the investment value will rise as well.
This is also known as the International stock fund or foreign fund. As the name suggests, your funds will be invested in companies in other countries. This is different from a global fund that covers any country – including your home country.
This is the Lifecycle fund. This type of TSP fund relies on professional investment mixes that take into consideration the risk in investment as it relates to your objectives based on time preferences. That means it balances the expected risk with the amount of returns that you need to meet your goals within a specified period. For instance, the longer you have before retirement, the higher the risk that you can tolerate. The shorter time frame means you cannot take on a lot of risks because you may not have enough time to recoup losses before retirement.
Benefits of having a Thrift Savings Plan
Now that you know the various TSP options that you can pursue, here are the benefits that should motivate you to take advantage of this plan.
You get agency matching contributions.
In the private sector, some employers match the 401(k) contributions of their employees. The TSP has the same privilege. The agency that you belong in can match your contributions, thus increasing your funds significantly.
Your contributions are automated.
You do not have to worry about keeping tabs on your monthly TSP contributions. The program allows your agency to take it out of your pay automatically every month. It is one less thing to worry about when preparing for your financial future.
You can catch up on contributions.
In case you are nearing retirement and you have yet to reach your retirement goals, you have the option to go beyond the maximum amount. This is only for employees who are 50 years old and above.
You have low fees and charges.
TSP carries some of the lowest fees and charges around. This is one of the best things about the program because this means you get to save more for your future needs.
You defer tax payments.
Your funds will only be taxed when money is taken out. That means your contribution will be invested as a whole. The more money you have, the more you can benefit from compound interest.
You can expect a smooth transition.
After you leave the service and transition into a civilian life, you can easily roll-over your TSP into its private counterpart which is a 410(k).