A better way to save: Keep money interest-growing TSP

  • Published
  • By Senior Airman Brok McCarthy
  • 51st Fighter Wing Public Affairs
OSAN AIR BASE, South Korea (AFPN) --  Saving for retirement is a good idea regardless of age and regardless of how you do it;though some ways are better than others.

One of those better ways is to place money into the Thrift Savings Plan. 

The TSP has been around for 20 years and was established by Congress to give federal employees the option to invest in a 401(k)-type retirement account.

Until this year, the TSP had an investment cap lower than that set by the Internal Revenue Service, but that was lifted, allowing servicemembers and other federal employees to invest up to the $15,000 allowed by law.

One of the largest benefits to the TSP is that it is a tax-deferred account, meaning all money placed in it is done so before taxes are calculated, making it so someone would have to pay less taxes come tax season.

For individuals in career fields who still receive re-enlistment bonuses, they may place up to $42,000 -- tax free, of course -- into their TSP accounts.

All money placed into a TSP account in a tax except combat zone is also tax exempt when it is withdrawn.

The only money that can't be put into a TSP account is money the government gives for a specific purpose, like clothing allowance and basic allowance for sustenance or housing.

The investment funds

TSP gives investors a range of investment options. The five basic funds are Government Securities Investment, or G fund, Fixed Income Index Investment, or F fund, Common Stock Index Investment, or C fund, Small Capitalization Stock Index Investment, or S fund and the International Stock Index Investment, or I fund. The Life Cycles funds, or L funds, were also just added this year.

The G fund is the safest of all the funds because it is impossible to lose any money investing in this fund because the government guarantees the interest rate. All money invested in this fund is invested in short-term U.S. treasury securities. Over the past 10 years, the fund has averaged a 5.49 percent return.

The F fund is based on the Lehman Brothers U.S. Aggregate Index, an index representing the bond market. This fund is relatively low risk, but can have a negative return as it did in 1994 and 1999. Over the past 10 years, the fund has averaged a 6.61 percent return.

The C fund was designed to mirror the Standard and Poor 500 and is made up of a large diversification of large- and medium-sized U.S. companies. Because of its make up, there is a risk to lose money in the C fund if the S&P 500 Index declines. Over the past 10 years, the fund has averaged a 9.07 percent return, but has had a negative return, causing people to lose money four times since it was created in 1988 -- in 1990 and 2000 through 2002.

The S fund has only been in existence since 2001, but its one- and three-year average returns were almost identical to the Dow Jones Wilshire 4500 Completion. The fund is made up of small and medium-sized U.S. companies and since its inception has averaged an 8.94 percent return, with negative returns in 2001 and 2002.

The I fund is the final fund. As with the S fund, the I fund was created in 2001 and has nearly mirrored the Morgan Stanley Capital International EAFE Index, the fund it was modeled after, for its one- and three- year returns. Also similar to the S fund, it had negative returns for 2001 and 2002. Since it was created in 2001, the fund has averaged a 6.42 percent return.

The L funds are a combination of the different investment funds based on how much time until an individual retires and how much risk that person is willing to take on. As a person gets closer to the fund maturity date, the more money is invested into the G fund to ensure a return on money invested. Once an individual has invested money into the TSP, it is possible to move the money around within his or her account as often as they would like.

Taking out a loan
Another benefit to the TSP is individuals may take out loans from their account while they are in the military.

There are two types of loans: a general purpose loan and a loan to purchase a residence. Only one loan may be taken out at any time, and for a general loan, it must be paid back in five years or if it is a loan to buy a home, it must be paid back in 15 years. In addition, loans must be between $1,000 and $50,000, but not to exceed the amount of money currently in an account. There is also a $50 fee for processing and servicing the loan.

Individuals must also pay interest on any loan they take out, though the interest goes back into their retirement accounts. This rate is the most current rate of return on the G Fund.

It is also possible to withdraw money from a TSP account entirely; however, doing this causes a 10 percent tax penalty to be placed on the withdrawal on top of the tax being removed from the tax deferment.

One important thing to note is individuals who are married must submit written spousal permission along with their loan or withdrawal request against their TSP account -- even if the servicemembers and spouses are separated.

For more information on the TSP, visit www.tsp.gov.

Editor's note: Information for this article was taken from the TSP Web site.