How does TSP work

TSP stands for the Thrift Savings Plan which is essentially the 401 k or retirement account for military and government employees. As of now anyone joining the military or civil service are now automatically put into TSP. However if your spouse joined the military before 2018 it’s not guaranteed they have TSP since they might be on the High 3 Retirement system. As far as military goes, the TSP is the account they can put their money into to boost their retirement. It is separate from their military retirement.

There are 2 types of accounts that can be set up:

Traditional TSP-this basically means your spouse can put money in and not pay taxes on it until they start taking it for retirement when they’re 59 1/2. This means more money is put into the TSP upfront but consider what the tax bracket will be when your spouse is retired.

Roth TSP-means paying taxes on the money before it goes into whichever fund is chosen or is chosen for you by the military. So yes, your spouse will have less money going in but they won’t have to pay taxes on it at 59 1/2.

Now that you know the different account types understand your spouse or the military will pick the funds that the money will go in. The following explain different funds within your spouse’s account:

G Fund: Think US savings bond. Essentially, you hold this bond for 10-30 years and get a small return on your money. This fund is made of many government bonds, T bills and other fixed income investments. While you will probably get your money back with 2.30% (10 yr return) it won’t necessarily keep up with inflation of 3%.

F Fund: very similar to the G Fund but instead of government bonds or T bills, they are fixed income investments from companies. It’s still the same concept of the G fund; lower risk and the rate of return is slightly higher at 3.73% (10 yr return) then government funds but still not usually enough to keep up with inflation.

S Fund: The funds mirrors the Dow Jones industrial average which is made of small companies. You get a higher rate of return of 13.67% (10 yr return) but the risk of the business having a downturn or go out of business completely is higher.

C Fund: This fund is similar to the Standard and Poors (S&P) 500. These include well established companies like Cola-cola or Amazon. They have a lower rate of return 13.17% (10 yr return) but they are less volatile then the S fund stocks.

I Fund: This fund includes stocks of international companies that have a rate of return of 6.48% but you can lose and gain money because of changes in currency.

L Funds: These funds mix all 5 funds to appropriately allocate risk according to your retirement decade. Currently, there is the L2020, L2030, L2040 and L2050.

TSP is a great way to boost the servicemembers retirement funds regardless of which military retirement system they are on. The expense ratios are low 0.040-0.041, they are many different funds and account types to meet your family financial needs for the future.

Does your spouse have TSP? Did you know the military gives the option to a retirement plan on top on military pension? Please share your comments below!

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