Thrift Savings Plan (TSP) Q&A

[BADFNZ]

From what I understand there are two potential benefits to the TSP. One is if you're in the group of federal employees that gets matching contributions. The other is that it doesn't have a yearly contribution limit. Your traditional IRA is going to have a $4000 limit this year.

You may be able to convert it to a Roth IRA. You would have to pay taxes on it now, but Roth IRAs have a lot of advantages over traditional IRAs for a lot of people.

I was under the impression that I couldn't convert it to a Roth IRA because I'd have to pull the money out, pay the tax and penalty, then put it into a Roth IRA. I think the only roll over options were a Traditional IRA or TSP.

According to trusty Wikipedia, you can convert a Traditional IRA to a Roth IRA. Maybe I'll have to look into that.

https://en.wikipedia.org/wiki/Traditional_IRA

[Guest Sparky]

From what I understand there are two potential benefits to the TSP. One is if you're in the group of federal employees that gets matching contributions. The other is that it doesn't have a yearly contribution limit. Your traditional IRA is going to have a $4000 limit this year.

You may be able to convert it to a Roth IRA. You would have to pay taxes on it now, but Roth IRAs have a lot of advantages over traditional IRAs for a lot of people.

Here are a few things to consider when deciding on the best way to go. If you start investing in Roth IRA early, while your not making a lot of money (because once you make over a certain amount..you can no longer contribute) you will have tax free capital gains once you reach 59 1/2 years of age. Btw...IRA contribution limits are $5000 starting in '08, the difference between the Roth and a traditional IRA is that your investment w/ the Roth is post tax investment, meaning that you will have already paid tax on the $5k you invested but once you cash out (59 1/2 years of age)...your gains are 100% tax free. IMHO, you should first max out your Roth, then anything left over should go into TSP or 401k or whatever you want. My wife and I have been maxing out Roth every year for the past 10 years (except 2005 because we made too much money) and anything left over we contributed to TSP. Keep in mind that you are not required to invest in anything specific with your Roth IRA, you can do what is called "self-directed" where you can buy stocks or mutual funds with it and trade with it just like a brokerage account. In fact, I actually have a Roth IRA brokerage account with some money in there to play around with. Here is my plan for the future in regards to Roth/TSP: Once my wife and I are 60, let's say each of our Roth IRA's are worth approx $2 million...totalling $4 million. The principal investment would have been somewhere in the neighborhood of $180K, that means we will have tax free capital gains of $3.8 million...yes, tax FREE. That is why I think Roth is the way to go. TSP is not bad either...we have contributed to that as well, but will only access that if we have exhausted all tax free gains from Roth. If we never need it, it will be left to our kids who will be able to cash it out tax free as an inheritance. My .02 cents

[Jaded]

I was under the impression that I couldn't convert it to a Roth IRA because I'd have to pull the money out, pay the tax and penalty, then put it into a Roth IRA. I think the only roll over options were a Traditional IRA or TSP.

You would have to pay tax on it, but you'll pay tax on a traditional IRA as well once you take it out, and possibly at a higher tax rate. It's all about whether or not you think your tax rate is higher now than it will be during retirement. If your current tax rate is higher, go traditional. If it is lower, go Roth.

Sparky, good advice. Any words on how much to put into TSP on top of the Roth? Even 30 years at $5k/year is only $150k principle.

[BADFNZ]

You would have to pay tax on it, but you'll pay tax on a traditional IRA as well once you take it out, and possibly at a higher tax rate. It's all about whether or not you think your tax rate is higher now than it will be during retirement. If your current tax rate is higher, go traditional. If it is lower, go Roth.

Sparky, good advice. Any words on how much to put into TSP on top of the Roth? Even 30 years at $5k/year is only $150k principle.

But since my current retirement is not compatible with a Roth IRA, I would have to pull the money out of the fund, which not only would get taxed but would get penalized for early withdrawl. I know it will get taxed either way, but with the traditional IRA, I can roll it over without pulling it out and incurring a penalty like I would with the Roth.

I might look into rolling it into a traditional IRA and then converting it to a Roth IRA. That seems to be the best plan.

Edited November 27, 2007 by BADFNZ

[Guest Sparky]

Sparky, good advice. Any words on how much to put into TSP on top of the Roth? Even 30 years at $5k/year is only $150k principle.

How much to put into TSP is personal preference! I personally have been investing right at $15K...but Roth is my first investment. Diversification is the magic word when talking about investments, would not recommend putting all your eggs in one basket (stock market/mutual funds). I personally spread it out (STS) in the market (stocks/mutual funds), bonds (municiple is great...high returns, no risk), real estate (both rental/investment properties and land speculation), and a little bit of precious metals.

You are correct that it is only $150K in principle, but at 10% that will be around $992,000 and if in roth means $842K tax free.

[Finance_Guy]

The other is that it doesn't have a yearly contribution limit. Your traditional IRA is going to have a $4000 limit this year.

TSP plans do have a yearly limit. For 2007 it's $15,500. If over 50, you have a catch-up option to put in another $5000. These are all called the "deferred" amounts. Any amounts contributed while tax-free for the month are exempt and you can put in much more...I think the last figure was about $45,000.

Check out the link for TSP announcements--look for I.R.C Limits. TSP Announcements

[Guest LocoF16]

Like it was said many times earlier, a Roth IRA is the way to go and should be where you invest first and most. My wife was a teacher for three years and had some 403 plan that we had to do something with when she stopped working. We converted it to a traditional IRA with USAA and then to a Roth IRA which we did have to pay taxes on. However, as mentioned earlier that will be a more profitable decision in the long run.

I also contribute a small amount to the TSP because there is a perk to having money in that account. The TSP allows you to take out loans on the balance of your account, with an extremely low interest rate (something like 4.6% right now). You can even set your own terms of repayment and all of the interest you pay goes back into your account. So technically you don't really "lose" any money. I used this to pay the closing costs on my house last year, and the repayment options are even more flexible if you use the loan for a home purchase.

I'll also second the motion to diversify, especially in real estate. Having an investment property has huge tax benefits and can eventually provide income. Also, remember that 59.5 is the golden age that you're allowed to touch alot of this money, so if you want to retire before then you'll have to make some other investments to do that.

[sputnik]

I'm a huge fan of VSP...but can't really articulate why. Limited funds but incredibly low fees and very nice returns last couple years.

At any rate, one thing to remember is that TSP also tracks your tax free contributions. Those months that you hit a combat zone tax exclusions are totaled separately, as is everything that compounds off it. Tax free forever.

Otherwise, I think everyone else on here is smarter than me so I'll leave it at that. Good luck.

Okay one thing, your job didn't contribute to social security? Isn't that illegal?

[Guest Sparky]

I'm a huge fan of VSP...but can't really articulate why.

Sputnik...I think this may have been a Freudian slip. Having said that, we are all fans of the VSP...but all don't qualify. Most of us are also fans of the TSP:)

[Whitman]

Max out Roth first and foremost, make it a priority and it will pay off! TSP and personal investment accounts are good but focus on that $444.44/month first.

Also remember that military aviation is inherently dangerous. 59 and 1/2 isn't necessarily a guarantee. So put away a reasonable amount of money each month and enjoy the rest. Like anything else in life, moderation is key......that goes for investing too!

[BADFNZ]

Okay one thing, your job didn't contribute to social security? Isn't that illegal?

All municipal gov't jobs that I know of do not contribute to SS. Most have a separate retirement fund that is set up and funded through the city itself. I'm not sure if state and federal gov't jobs have the same but they might. There is also a system called TMRS (Texas Municipal Retirement System) that is a municipal retirement system that will transfer to other cities if they are participating members. The city I work for is not a member, but most Texas cities are.

https://www.tmrs.org/about.shtm

[C17Driver]

At any rate, one thing to remember is that TSP also tracks your tax free contributions. Those months that you hit a combat zone tax exclusions are totaled separately, as is everything that compounds off it. Tax free forever.

I've noticed that TSP tracks my tax free contributions, but my understanding is that everything compounded off of those contributions is still only tax-deferred.

I say that because the TSP website says: "You receive no direct tax benefit from contributing pay to the TSP which has been excluded from gross income; however, the earnings on those contributions are tax-deferred."

Full text can be found here: https://www.tsp.gov/uniserv/features/chapter03.html

It would be awesome if I were wrong because as is the case with most of the AMC guys here, I have a pretty good tax-exempt amount in my TSP.

[Guest ChaffMaster]

I've noticed that TSP tracks my tax free contributions, but my understanding is that everything compounded off of those contributions is still only tax-deferred.

Pretty sure Driver is right--my tax free portion of the account does not "grow" unless I contribute while in a tax free zone.

The big thing here is to invest wisely. Roth should be your primary target, followed by other avenues--traditional, TSP, and non-IRA investments (remember, you might need some money prior to 59 1/2). Don't count on Social Security whatsoever.

To answer your question, it would probably be easier to roll it over into a traditional IRA. It may be possible to convert to a Roth, but you will have to pay taxes now on the principle and any gains that it has made. When Roths first became established, I converted by IRA accounts, but I also had the option to spread it over 4 years of tax returns. You will probably not have this option. In fact, I wish I would've converted them during the tech bubble burst as probably wouldn't have owed them anything.

As for TSP, it's not a bad option and their funds are essentially index funds, and they recently added "target" fund options in which they automatically shift percentages in each of the areas based on your target date. Still waiting for them to offer matching contributions like they offer to the postal and other federal worker. What a double standard...

FYI, there are several jobs in which you do not have to contribute to social security--this is a misnomer. My aunt was a teacher in the Chicago school district and NEVER contributed to SS--the city of Chicago created their own retirement program. I think railroad workers and some others are also SS exempt. This was all hashed out back the 1930s when SS was being created.

Hope this helps

[sputnik]

Sputnik...I think this may have been a Freudian slip. Having said that, we are all fans of the VSP...but all don't qualify. Most of us are also fans of the TSP:)

Holy shit, you called it. I had to read that a couple times before I even got what you were saying.

I must have wanted VSP more than I even knew

[sputnik]

I've noticed that TSP tracks my tax free contributions, but my understanding is that everything compounded off of those contributions is still only tax-deferred.

It would be awesome if I were wrong because as is the case with most of the AMC guys here, I have a pretty good tax-exempt amount in my TSP.

What you say makes sense now that I think about it. TSP comes off pre tax income in general. I'll nose around try to figure out where I got that idea. For some reason I thought I read it.

[Finance_Guy]

Another good deal is the program that lets you deposit money from your paycheck and get what I believe is a guaranteed 10% return while you're deployed to a "hostile" area.

I think you can even give them a check for $10,000 when you show up and draw 10% return on it while you're in the AOR and around 6 months after you leave.

Adding info-Searched forums and only found post above dealing with SDP. You cannot put in $10K up front. Must be in the qualified zone for at least 30 days and then the limit per month is disposable income.

RE: https://www.defenselink.mil/comptroller/fmr/07a/07a_51.pdf

Sent: Monday, June 23, 2008 8:26 AM

Subject: Policy & Procedure Update - Automatic Refunds of Saving Deposit Program (SDP) Accounts

TOPIC: Automatic Refunds of Saving Deposit Program (SDP) Accounts

1. The purpose of this message is to notify all military members who participate in the current saving deposit program of a change in policy regarding the transfer of the balance of any dormant SDP accounts.

2. A military member may contribute to an SDP account while assigned to a combat zone or other qualifying area. Ninety days after the member leaves the combat zone or qualifying area, the SDP account becomes inactive or dormant and stops earning interest. Please note that a member may request a withdrawal of funds at anytime after their assignment ends.

3. Effective April 30, 2008, and each month thereafter, the Defense Finance and Accounting Service will automatically transfer the balance of any dormant SDP account, 120 days after the termination of qualifying combat duty assignment, to the member's military pay account.

4. To request an earlier withdrawal of the balance of funds from their account, members can access the MyPay website using following address https://mypay.dfas.mil/mypay.asp//.

5. Questions concerning the SDP account statement or 1099-INT tax statement should be directed to the Centralized customer support unit at 1-800-624-7368, Comm. (216) 522-6545, or DSN 580-6545 during the hours 0700 thru 1800.

6. For MyPay assistance call 1-800-390-2348, Comm. (216) 522-5122, or DSN 580-5122 during the hours 0700 thru 1830 est.

......

10. Please ensure the widest dissemination.

[MilitaryToFinance]

if we're giving financial advice here, here's my $0.02, in priority order:

#1 - have an "emergency fund" - as a military officer i'm not worried about losing my job/livelihood, so i think $5k is a safe enough amount. use this to pay for an emergency plane ticket somewhere, to pay a deductible if you have an accident, etc.

#2 - max out the Roth IRA every year. this year (05) you can contribute $4k, and it goes up $1K every year until (when, i forget). again, you pay taxes on the roth ira now, so when you want to take your money out when you're 62 or whatever, you take what you want - you won't pay taxes when you take money out. that's why the Roth IRA is so appealing - pay taxes on it now, while you have a full time job and you're able - not when you're 62/70/whatever and you're living on your retirement...

#3 - pay off your credit cards/loans. start with the one with the highest interst first. pay as much as you can each month until it's paid off (while paying the min on the rest). repeat until your debt is paid off. when you pay off the credit card(s), close the account, consolodate - you don't need a credit card for each of your favorite stores. one MC/VISA/Discovery/AMEX is all you need...

#4 - diversify your portfolio - invest in TSP if you want. it's very easy to set up, it is all automatic - no checks or whatever.

the reason why you want to do #2 before #3, even though you're using $4k of available cash for #3 is because you want to invest in your future first!

some folks have a hard time investing before paying off credit/loans. however, remember that the money you invest will gain interest and even single digit interest, compounded over 40 years turns out to be a lot of dough!!

I know this post was from almost 3 years ago but its on the first page of this thread so if you're reading through it for a first time like I am I really felt it needs to be addressed. The idea of doing #2 then #3 as stated above is terrible advice. Most CC interest is anywhere from 18-25%. So you can think of that as a negative return every year. So for every thousand dollars you invest instead of paying off your credit card you would have to return greater than 25% on that money to simply break even. PAY OFF YOUR HIGH INTEREST DEBT FIRST! Now if its student loans at ~6% this would make sense because averaging a 10% return is pretty simple. But anything with a high interest rate and you may think you're investing in your future but really you're just hurting yourself by not paying it off instead.

[Champ Kind]

Am I the only one that is hesitant to invest into TSP or an SDP because I feel like I can't even trust the AF to get my normal pay right, there alone larger sums of money?

[T Pain]

I put 8% into the Lifecycle 2040 and am really happy with it so far. It's taken out before anything and there are no worries about moving the money around to differentr funds as the fund it self reacts to your predicted retirement. Pretty sure the Air Force doesnt deal with TSP, another upside to it.

[Toro]

Question for finance guy or anybody who has been in this situation -

I currently receive tax-free through September and receive ACP (bonus). IRA is maxed out, so I've elected to max out TSP to the tax-free $46K limit. Here are a few questions -

- Should I receive the ACP tax-free in it's entirety? The ACP payment date is within my one-year tax-free status. If I elect to contribute 100% of my bonus to TSP, will it go in tax-free in its entirety?

- For calculating the remainder of the TSP deposits, would it be beneficial to put in less basic pay now (tax-free) and dramatically raise the amount (75-80%) once I'm out of the tax free zone? I know it will be subject to tax upon withdrawal (tax deferred), but my rationale is to put in more of my taxable income in an attempt to put myself in a lower overall tax bracket come tax time.

- Any disadvantages to maxing out the full 46K? Again, I have already accomplished spar's steps 1-4 (step 3 first, of course).

I've tried searching the TSP and DFAS websites, as well as e-mailing DFAS, but they are completely useless for getting an answer.

[Ryder1587]

Ok this is off topic but thought I'd ask. I remember hearing a while back about a flight program that USAA does. You give them your flight pay every month and after like 20 years they give you about 1 million depending on the market. Anyone know of this or participating in it?

[Techsan]

#3 - pay off your credit cards/loans. start with the one with the highest interst first. pay as much as you can each month until it's paid off (while paying the min on the rest). repeat until your debt is paid off. when you pay off the credit card(s), close the account, consolodate - you don't need a credit card for each of your favorite stores. one MC/VISA/Discovery/AMEX is all you need...

Probably not the best advice either. I've always been told that its better to leave the account intact with $0 balance...you just have to be smart and not use the thing. Its better for your credit score than just closing each account.

[MilitaryToFinance]

Question for finance guy or anybody who has been in this situation -

I currently receive tax-free through September and receive ACP (bonus). IRA is maxed out, so I've elected to max out TSP to the tax-free $46K limit. Here are a few questions -

- Should I receive the ACP tax-free in it's entirety? The ACP payment date is within my one-year tax-free status. If I elect to contribute 100% of my bonus to TSP, will it go in tax-free in its entirety?

- For calculating the remainder of the TSP deposits, would it be beneficial to put in less basic pay now (tax-free) and dramatically raise the amount (75-80%) once I'm out of the tax free zone? I know it will be subject to tax upon withdrawal (tax deferred), but my rationale is to put in more of my taxable income in an attempt to put myself in a lower overall tax bracket come tax time.

- Any disadvantages to maxing out the full 46K? Again, I have already accomplished spar's steps 1-4 (step 3 first, of course).

I've tried searching the TSP and DFAS websites, as well as e-mailing DFAS, but they are completely useless for getting an answer.

Not being on AD I can't answer that question but I have one for you. Why put the tax free pay in the TSP at all? You aren't getting any favorable treatment on it and your investment options are woefully limited. Unless you don't feel comfortable choosing your own investment vehicles it would make far more sense to open up a standard brokerage account somewhere and invest that tax free money on your own. You'll have the flexibility to get at the money should you need it and to invest in any means you see fit. Personally unless I'm trying to play the "lower my tax bracket game" I don't really think I'll contribute at all to the TSP. With no matching contributions and how low your tax bracket is(at least for the first 4 years or so) there are just lots of disadvantages and not very many advantages to the whole program. You won't be taxed on the income whether its in the TSP or not so why limit yourself to their crappy choices?

Probably not the best advice either. I've always been told that its better to leave the account intact with $0 balance...you just have to be smart and not use the thing. Its better for your credit score than just closing each account.

This one really varies so much from person to person it is hard to give a blanket statement eitherway. When calculating your score things like the number of cards, debt used out of total debt, duration accounts have been open all play a part. So keeping a card open with no balance can help if you do have a balance on another card. With 2 cards at $10,000 max and carrying $5,000 in debt if you close a card you're using 50% of your available credit but leaving it open you're only at 25% of available. Typically you want to be under ~30%. On the other hand, if you have 7 or 8 credit cards with $10,000 each that shows you as a pretty big liability. Even if you only have $5,000 total in balances on those cards a bank will look at that and say, if we give you a car loan today, tomorrow you could rack up an additional $75,000 of debt instantly.

Its a fine line and what is good for some is bad for others, working your credit score isn't as much of a science as you would think it is. Also, for those people(lots of college kids do this) who fill out the application for a credit card just to get free stuff and then immediately cancel the card. That still goes on your credit report and having lots of accounts open for short periods of time will hurt your score as well. Nothing in life is free.

[addict]

By my best understanding, earnings from tax-free contributions will be subject to your future income tax. That's far worse than current long-term capital gains tax seen in a savings account.

~Net Basic Pay to the TSP for the next few months while I'm home... to diversify and eliminate my 25% income taxes.

Until I figure this tax-free TSP contribution crap out.

[Finance_Guy]

Question for finance guy or anybody who has been in this situation -

I currently receive tax-free through September and receive ACP (bonus). IRA is maxed out, so I've elected to max out TSP to the tax-free $46K limit. Here are a few questions -

- Should I receive the ACP tax-free in it's entirety? The ACP payment date is within my one-year tax-free status. If I elect to contribute 100% of my bonus to TSP, will it go in tax-free in its entirety?

- For calculating the remainder of the TSP deposits, would it be beneficial to put in less basic pay now (tax-free) and dramatically raise the amount (75-80%) once I'm out of the tax free zone? I know it will be subject to tax upon withdrawal (tax deferred), but my rationale is to put in more of my taxable income in an attempt to put myself in a lower overall tax bracket come tax time.

- Any disadvantages to maxing out the full 46K? Again, I have already accomplished spar's steps 1-4 (step 3 first, of course).

First, about the only good info I know of that trys to explain TSP in relation to Combat Zone Tax Exclusion is AFMAN 65-116, Vol 1, Chapter 68. Check it out in AF Pubs. It's a huge 44 MB file, so you may want to download. Will try to attach a TIF of those pertinent pages--nope, can't attach .tif files. Made a few JPGs out of them. The manual has not been updated to reflect current maximum contributions. To attempt to answer your questions.

#1. Officer elections into TSP (exempt) are also capped at the highest enlisted just as the current Base pay and other entitlements, but done so independently. So the ACP Authorization/Payment paid in a tax-free month along with any other elections will be limited to $6,875.10 plus the $225 IDP. If you elect 100% of the bonus, then any remainder would be deposited to the TSP (Deferred) which caps out at $15.5K. This is by far the most confusing part of TSP and CZTE and I can say I still don't fully understand it all. Refer to some examples in the AFMAN pages.

#2. In theory what you stated is correct, but the bottom line is ALL TSP deductions reduce your taxable income. I think what you mean is that while in a CZTE mode there is the 46K cap, but outside the CZTE, there is the $15.5K cap. Now to put less in while in a CZTE area so you can put more in later doesn't follow--CZTE contributions are "Exempt" (don't hit against the $15.5K cap) while contributions outside a CZTE area are "Deferred" I think if you have 100% of ACP set up, you are going to max out the $15.5K deferred anyway, so TSP deductions will stop automatically. However, if the ACP does not max out the $15.5K deferred limit, then the more you put in would reduce your taxable wages when not in a CZTE area. Bottom line, putting 100% of ACP in TSP while in a CZTE area is a bonus--see next paragraph for explanation.

#3. For this one, I'd prefer not to answer since I'm not a qualified tax or investment professional. I can say the TSP "Exempt" is a little known avenue to garner more than the $6,875.10 officer cap for exempt contributions. Example is those with a base pay that exceeds the cap..ex. $7,000 (an O-5 over 16 years). Say this O-5 puts has 10% to TSP and 100% for fly-pay ($800). While in a Combat Zone (CZ) the regular base pay is exempt up to $6,875.10, but fly-pay is not--it's still taxed in regular pay. But on the TSP side, since only 10% of base pay is going is as "Exempt" contributions ($700), that leaves about $6,175.10 left. That's when the Fly-Pay goes into TSP as "Exempt" contributions. This is due to the Officer cap is used separately in TSP than in the regular payroll. So for that particular month, in the O-5's regular net pay, they are tax-free on $6,875.10, but also the extra $800 fly-pay that went to TSP is also "Exempt" and will not have to pay tax on that portion whenever it's withdrawn from TSP down the road. Of course the $800 would have reduced wages in regular pay anyway since fly pay was elected for TSP. Same applies to the ACP bonus mentioned. In regular pay, if you cap out with base pay, then the entire bonus is taxable. But when the bonus get's applied to TSP, it will add another $6175 to your "exempt" TSP contributions. So for a bonus month, you can actually be tax free on close to double the $6875.

Confused as Heck? To really answer, I'd need some figures (base pay and ACP amounts) and when the ACP is due to be paid. PM me if you want. Does anyone have any real experiences with these scenarios to validate. I do remember seeing the fly-pay example while working in finance.

Edited June 25, 2008 by Finance_Guy