Thrift Savings Plan is a retirement savings plan for the armed forces and federal employees. Under this plan, contributions are made through payroll deduction, and the funds can be accessed in 3 ways – loans, post-separation withdrawals, in-service.
In the past few months, brokers have been encouraging federal employees to ditch the Thrift Saving Plan in favor of individual retirement accounts. The Thrift Savings Plan is hugely popular mainly due to its low fees. But, brokers work mainly for their own interests. They want to get the fees. As such, they use the best advertisement tactics to sell IRA to federal employees. But has this gimmick affected the TSP enrollment in a negative way? Let's find out.
Statistically, TSP is doing very well. In fact, TSP made a new record in July 2014 with 87.5% participants contributing for a safe and secured retirement life. Employees under the Federal Employee Retirement System contributed to the TSP accounts actively and helped to achieve this record. The previous record was triggered in January 2003 when the participation reached 87.4%.
The high participation percentage is primarily due to auto enrollment option. Since the last 4 years, new employees are automatically enrolled into the Thrift Savings Plan at a contribution rate of 3% unless they opt for any other plan. As per the Federal Retirement Thrift Investment Board (FRTIB), only 4% has rejected auto enrollment option in July 2014.
In the year 2009, the participation rate dropped steadily to 81.5% during recession. It was during this time, FRTIB proposed the legislation on auto enrollment in 2009 and it was officially implemented in 2010. Since then, the number of people participating in TSP has rapidly increased.
Have you finally decided to leave military? Do you want to switch your career? Well, you can certainly do so. After all, it is your life and you've the full right to spend it on your own terms. But what about the amount you've saved in TSP? Should you leave that as well? Think seriously before making any decision.
Unlike other retirement saving plans, TSP has low administrative fees. This means you may keep more of what you contribute. Throughout your career, you can save probably thousands of dollars for the golden years of your life.
Once you leave armed forces, you can no longer contribute to TSP account. However, you would be able to roll money into it from IRAs. You also have the option to change your investment mix through interfund transfer. However, before trying to change your investment mix, make sure you know how interfund transfers work.
One of the biggest benefits of TSP is that you get smart and simple investment options. It is a myth that a variety of investment options are always better. Sometimes, too much options create confusions. Under TSP, you get the option to invest amongst 5 funds and these are:
In case, you've any confusions regarding these 5 options, then you've one more option and that is the Lifecycle (L) Fund. It has been specially formulated to balance the expected risk and associated return with the aforementioned 5 funds.
Retirement eligible employees can start sending applications for phased retirement from November 6, 2014. The Federal Retirement Thrift Investment Board has already started analyzing the probable impact of phased retirement on the Thrift Savings Plan. People opting for phased retirement are allowed to contribute to the TSP but similar limitations regarding loans, age-based-in-service, financial hardship withdrawals will be applicable.
Some other TSP related issues that partial retirees have to remember are:
The contribution will be estimated on the basis of basic pay received every pay period.
TSP is a smart retirement savings plan for the armed forces. Prudent financial planning will help them achieve success and overcome obstacles. Now, it is their choice. They can either count on other factors (getting married to a wealthy spouse, use Social Security benefits, pensions, etc) or depend upon the TSP.