Thrift Savings Plan (TSP) Q&A

[ThreeHoler]

Roth TSP deposits are allotments set up using the MyPay website.

Tax free money can be deposited into the Roth TSP up to the elective deferral limit of $17,500. To deposit more than $17,500 up to $51,000, you must put the deposit into the Traditional TSP.

The combat zone allowance for us to go up to the $51,000 total contribution limit is our equivalent to the matching employer deposits other agencies get.

[Warrior]

This is basically what I'm trying to do. So far my execution has been poor.

https://www.tsp.gov/...oth/index.shtml

My thoughts (other investment vehicles not considered):

I dump $5k into my Roth IRA. In an ideal world, this $5k comes from tax free sources such as CZTE pay or left over TDY money so that it is never taxed. My next goal is $17k into the TSP. In the past (and until they finally open the Roth TSP), this contribution would serve to reduce my taxable income. If my ability to contribute is limited to $17k (i.e. I am unable to take advantage of the CZTE additional limit of $50k), there is only marginal advantage to putting tax free money into the Traditional TSP (this advantage being that the contribution will never be taxed). However, there is significant advantage to using tax free money in a Roth TSP.

So, let's say I wind up with a six month CAOC tour later this year after the Roth TSP is available (assume May-Oct deployment for shits and giggles). Let's also say I'm terrible at managing my tax free trips and don't manage a cha-ching for the remaining six months. Also, let's say I have everything set up so that I contribute monthly to both my IRA and TSP ($416.67 and $1416.67 respectively). Since I'm deployed so long, I plan to max out my SDP as well.

So, at the end of April I have $1666.68 in my Roth IRA and $5666.68 in the Traditional TSP. Before I deploy, I change my TSP allocations to the Roth TSP (same account) effective 1 May. I continue contributing throughout the deployment in this manner and prior to rotating home I change my allocations back to 100% into the Traditional TSP. So my balances at the end of the year are Roth IRA: $5000 (of which $2500.02 is never taxed and $2500.98 is post-tax); Traditional TSP: $8500 (all tax deferred); Roth TSP: $8500 (of which the entire amount is never taxed); SDP: $10000.

That is how I envision the Roth TSP being useful to most of us...sheltering tax free money for life.

[Jaded]

Your W2 won't show whether a traditional contributions is made in a tax free month or not. It will just show total amount.

[Jughead]

Would traditional contributions made in a tax free month still be deductible?

Only to the extent that your pay exceeds the CZTE limit (which you stated it does not). You get no immediate tax advantage to making a traditional contribution from money that's already tax-exempt. See below.

Source? That explains a lot, but I missed that bit of info in all my reading on the TSP website...

ETA: Reading comprehension fail. So does this mean I can put money in traditional TSP then when I get home I can put up to $17500 in Roth? Not to exceed a total of $51k for the year?

I think I was unclear myself, sorry. You cannot put the "extra" money (beyond the deferred contribution limit--$17.5K for 2013--up to $51K for 2013) into the Roth TSP, as others have stated. You can put up the deferred contribution limit into the Roth, but I suggest that's a costly idea, since it will "use up" your ability to make a deferred contribution to the traditional--every dollar you put in the Roth is one you cannot put in the traditional for that year. I suppose an exception may be if you expect to spend an entire year deployed (and therefore make no deferred contributions), the Roth would be a better deal since the earning would never be taxed (the tax-exempt principal is never taxed, even in a traditional).

ETA: I think (but am not sure, since I haven't been deployed since the Roth option came online) that there may be an issue with how DFAS handles tax-exempt contributions to the Roth. This may well be a case of it being technically possible, but the system isn't "set up" for it. FWIW, I've had problems with my TSP every single time I've deployed--a little effort has gotten it fixed. Good luck!

So, to your second question: YES, you can put money (tax exempt, that is) in your traditional TSP while deployed, then put up to $17.5K into your Roth when you get home. You allude to the $51K limit, and that's a big caveat--if you're deployed long enough & make large enough contributions to your traditional from tax-exempt money, you could hit that $51K limit and have $0 "available" to put in to either Roth or traditional once you get home. Once again, however I suggest you'd be better served (as I understand your point, it's to achieve maximum tax advantage) to manage your traditional contributions while deployed to shack as closely as possible $33.5K ($51K - $17.5K)in tax exempt contributions to your traditional, then make $17.5K in deferred contributions to your traditional when you get home (thus paying no tax on an additional $17.5K this year, on top of your tax exempt deployed pay). If your ability to contribute in either scenario is less than the limits (can't get to $33.5K while deployed), then you don't need to worry about managing it--just put the max you can into traditional, both while deployed and when home.

On the other hand, if your tax situation is such that you feel the Roth benefit is greater, long term, then make that $17.5K contribution to the Roth once you get home, with the understanding that you will pay tax on it. If you're going this route, and you're able to reach the $51K limit, then I'd say making both the Roth and traditional while deployed would be OK--but, as others have pointed out, it won't change your tax situation this year.

Your W2 won't show whether a traditional contributions is made in a tax free month or not. It will just show total amount.

True--but misses the point of his question, I think. Your ability to make a tax-exempt contribution is absolutely dependent on whether the month in question is tax-exempt or not. If you plan to contribute $17.5K or less, this is a moot point. If your goal is to exceed this amount, than you must manage your contributions to make those "extra" contributions (from a tax-exempt amount) during the CZTE month.

Edited March 17, 2013 by Jughead

[Warrior]

Jughead - I think we're on the same page as far as the benefits of different types of contributions.

My real problem is getting DFAS to take money out of my paycheck and deposit in in TSP. Maybe I'll try making a traditional contribution for next month since I can't seem to get them to let me make a Roth contribution. It would be much easier if I could write a check....but I'm starting to get irritated that I won't be able to contribute as much as I'd like based on the fact that 3 months have passed with zero deposits and it's my understanding that I can't "back date" or otherwise contribute money that has been deposited in my checking account.

Thanks again.

[nsplayr]

... it's my understanding that I can't "back date" or otherwise contribute money that has been deposited in my checking account.

Say what? There are annual limits on contributions, not monthly. If you want to deposit some money you have just sitting in your checking account (from past months you haven't been able to contribute, from a bonus, etc.), just put in a huge TSP contribution for a month or two (i.e. 99% of your pay) and use that money in your checking account to live. Repeat until you've deposited all the "extra" you want. Problem solved.

[ThreeHoler]

Say what? There are annual limits on contributions, not monthly. If you want to deposit some money you have just sitting in your checking account (from past months you haven't been able to contribute, from a bonus, etc.), just put in a huge TSP contribution for a month or two (i.e. 99% of your pay) and use that money in your checking account to live. Repeat until you've deposited all the "extra" you want. Problem solved.

If you exceed 86% of base pay or something like that you will get flagged by the system for review before they let you contribute that much.

[Warrior]

If you exceed 86% of base pay or something like that you will get flagged by the system for review before they let you contribute that much.

Checks.

[Jughead]

It would be much easier if I could write a check....but I'm starting to get irritated that I won't be able to contribute as much as I'd like based on the fact that 3 months have passed with zero deposits and it's my understanding that I can't "back date" or otherwise contribute money that has been deposited in my checking account.

Not true--that's exactly the situation I've found myself in every time I've deployed--because of the fact that the first month of tax exemption typically lags, and I want to put every dime I'm entitled into the TSP. It takes a "CMS case" (I think that's the term), then you write a check (I did it via Eagle Cash). That's the "effort" I mentioned, because the airman behind the desk isn't going to know what to do

use that money in your checking account to live. Repeat until you've deposited all the "extra" you want. Problem solved.

UNLESS what you're trying to achieve is maximun $ into the TSP--and you can't get there if you've eliminated one or more months' worth of contributions. Also, what ThreeHoler said re max contribution within any month (e.g., your FICA & Med withholding affect how much you can contribute).

[Homestar]

After January 2015 TSP removes the option to simply elect an amount to contribute (as opposed to a % of base/incentive/bonus pay) making the math problem to get as close to $18,000/year without going over more...math-ey....

What happens if my last TSP payment of the year takes me over the limit by, say, $100?

Edited January 15, 2015 by Homestar

[LJ Driver]

TSP won't let you go over unless you have tax free contributions.

[Disregard]

TSP will withdraw up to the exact maximum amount, so set it up to take just over $18,000 and you'll be fine.

[MooseDriver1]

I'm sure others are dealing with. Have been throwing 10% for almost 14 years into TSP and am trying to figure out what I should do with it in the future.

Have stopped all contributions since joining the Reserves a few months back and now have an airline 401K that I will be maximizing.

Is it worth rolling my TSP into the 401K? I have lots of tax free contributions that I'm sure wouldn't carry over to withdrawing from 401K in the future. Additionally, might be a bit safer to have some diversity in my investing.

Any other pros/cons or recent experiences?

[ThreeHoler]

TSP has lower expenses than almost any other 401K out there.

[stick]

Is it worth rolling my TSP into the 401K? I have lots of tax free contributions that I'm sure wouldn't carry over to withdrawing from 401K in the future. Additionally, might be a bit safer to have some diversity in my investing.

Any other pros/cons or recent experiences?

If you chose to roll-over, the taxable portion of your TSP account will be sent straight to your institution for your traditional IRA account, and the tax free portion will be sent to you directly as a check. You'll have 60 days (I think) to send it in to your civilian institution for them to deposit into your Roth account.

It wasn't exactly painless (the TSP form has to be notarized) but I'm glad to be done with the TSP program. I hated the TSP website and the daily fund information wouldn't download into Quicken, so the choice was easy for me.

[Mark1]

I'm sure others are dealing with. Have been throwing 10% for almost 14 years into TSP and am trying to figure out what I should do with it in the future.

Have stopped all contributions since joining the Reserves a few months back and now have an airline 401K that I will be maximizing.

Is it worth rolling my TSP into the 401K? I have lots of tax free contributions that I'm sure wouldn't carry over to withdrawing from 401K in the future. Additionally, might be a bit safer to have some diversity in my investing.

Any other pros/cons or recent experiences?

You should be looking for only two things in an investment plan:

The ability to approximate the total market with the provided funds

Minimization of expenses

TSP allows you to approximate the total market fairly well. You could perhaps do slightly better on your own, but it would take a decent amount of effort and any benefit would be negligible in the long run.

You will not find a fund in the private sector that comes close to TSP expense ratios. Even low maintenance funds in the private sector that are widely considered to be 'great' in terms of expense ratios are ~3 times more expensive to the investor than TSP (for example: the SPY ETF). On top of that, TSP trades are free so re-balancing your account costs you nothing.

Take whatever you have in TSP and find a mix of the available funds to suit your risk tolerance (or use the lifecycle funds), and then come back every 6 months to re-balance the funds back to your ideal mix. In between that time, forget about it. At retirement your TSP account will have more cash in it than had you attempted a comparable strategy with any other private sector fund.

There is no good monetary argument for removing your funds from TSP (assuming you're still investing on a 'long term' timeline). If some buddy of yours tries to convince you that TSP is shit, make sure you educate yourself before you make the irreversible decision to withdraw from the Program. Once you pull your funds, you can't get back in when 5 years down the road you realize your mistake.

I have only one complaint with TSP, and really I'm probably just being protected from myself. I'd like to be able to sit everything in my account on the sideline as cash if I want. Financially it makes no sense, but I still find myself wanting the security of knowing I could if I wanted to. However, it's not enough to pass up the opportunity to participate in TSP. I can move my civilian sector investments to cash if I feel the need, and again, it's a stupid move anyway.

[BONE WSO]

I have only one complaint with TSP, and really I'm probably just being protected from myself. I'd like to be able to sit everything in my account on the sideline as cash if I want. Financially it makes no sense, but I still find myself wanting the security of knowing I could if I wanted to. However, it's not enough to pass up the opportunity to participate in TSP. I can move my civilian sector investments to cash if I feel the need, and again, it's a stupid move anyway.

The G Fund cannot lose money so you could move it there if you wanted and you would get the same effect as cash.

"The G Fund assets are managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a nonmarketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money."

https://www.tsp.gov/investmentfunds/fundsoverview/fundManagement.shtml

[Disregard]

There is no good monetary argument for removing your funds from TSP (assuming you're still investing on a 'long term' timeline). If some buddy of yours tries to convince you that TSP is shit, make sure you educate yourself before you make the irreversible decision to withdraw from the Program. Once you pull your funds, you can't get back in when 5 years down the road you realize your mistake.

I disagree with the "no good monetary argument." Growth on TSP tax-exempt contributions is not exempt from tax when you withdraw it, only the principle is tax-free. However, if you rollover your combat pay contributions to a Roth IRA, all of that money (principle and growth) should be tax-free upon withdrawal. I say "should" because I'm in the process of converting my TSP to Vanguard--just need to find a notary first.

Compare similar funds from TSP to Vanguard to see if the slight difference in expense ratio is made up by a better overall performance by the Vanguard fund. For instance: L2050 to VFIFX.

[Mark1]

I disagree with the "no good monetary argument." Growth on TSP tax-exempt contributions is not exempt from tax when you withdraw it, only the principle is tax-free. However, if you rollover your combat pay contributions to a Roth IRA, all of that money (principle and growth) should be tax-free upon withdrawal. I say "should" because I'm in the process of converting my TSP to Vanguard--just need to find a notary first.

Compare similar funds from TSP to Vanguard to see if the slight difference in expense ratio is made up by a better overall performance by the Vanguard fund. For instance: L2050 to VFIFX.

To your first point, I hadn't thought of that. In that case, if you're able to transfer only the tax-exempt portion out, then that's a benefit. If you have to transfer all or nothing, you'd have to look at the ratio of tax-exempt to taxable contributions in your account and decide if the lower expense ratios will overcome the tax advantage of transferring out over time.

To your second point, any disparity in performance between L2050 and VFIFX is due purely to chance, and should not be considered in a decision of where best to place your investment. Over the long term they will both converge towards the same return percentage, minus expenses. The fund with the lower expenses is best.

Vanguard funds are, in general, the best option open to the general public, so it's hard to go wrong with them. However, TSP is objectively the better option for taxable principal.

[stick]

To your first point, I hadn't thought of that. In that case, if you're able to transfer only the tax-exempt portion out, then that's a benefit. If you have to transfer all or nothing, you'd have to look at the ratio of tax-exempt to taxable contributions in your account and decide if the lower expense ratios will overcome the tax advantage of transferring out over time.

To your second point, any disparity in performance between L2050 and VFIFX is due purely to chance, and should not be considered in a decision of where best to place your investment. Over the long term they will both converge towards the same return percentage, minus expenses. The fund with the lower expenses is best.

Vanguard funds are, in general, the best option open to the general public, so it's hard to go wrong with them. However, TSP is objectively the better option for taxable principal.

You can't only roll-over the tax-free portion.

So over the past 10 years I've tested your theory of "lower expenses always equals better performance" because I was curious myself and I'm a financial dork.

I made my 2045 Retirement Roth IRAs at Vanguard and T Rowe Price the exact same monetary amount, and then monthly invested the same amount in both funds. The Vanguard expense ratio is %0.18 and the T Rowe Price expense ratio is %0.76.

The difference in the two funds has grown steadily over the past 10 years, and today the T Rowe Price account is $1,600 more than the Vanguard fund. Feel free to call 10 years of results random luck, but I'm comfortable calling my experiment finished and I'm only putting future dollars into the T. Rowe Price account.

I also find TSP's life cycle funds to be way too conservative with their allocation. 25% in fixed income for a retirement in 35 years? No thanks.

My last beef with TSP is the ability of AF Finance to play with your contributions. I had a good buddy spend a year fighting finance (and eventually lost) because a SrA thought he wasn't really on a 365 and removed thousands of contributions from his fund for an extended period of time.

The only good thing about TSP is the military makes it easy to register, so people who wouldn't otherwise invest are probably doing so because of TSP.

[Mark1]

Feel free to call 10 years of results random luck...

I also find TSP's life cycle funds to be way too conservative with their allocation. 25% in fixed income for a retirement in 35 years? No thanks.

My last beef with TSP is the ability of AF Finance to play with your contributions. I had a good buddy spend a year fighting finance (and eventually lost) because a SrA thought he wasn't really on a 365 and removed thousands of contributions from his fund for an extended period of time.

I'm glad it worked out for you, but yeah, a single 10yr trial demonstrates nothing. Historical analysis would actually suggest that the higher returning fund will do worse than its peers moving forward (on your investment timescales that fact is negligible though).

It's not a theory that you have to test for yourself. There's plenty of historical data. A proper statistical analysis is probably beyond what most people are capable of or willing to do, but luckily there are plenty of people that have already done it for you. It's been shown time and time again, no genius fund manager can beat the market unless they're doing something illegal. So the best idea is to index the market, and forget about it (and obviously you'll have to move away from indexing the market as you get closer to retirement in order to reduce volatility).

The lifecycle funds are decent for somebody who isn't willing to put in a little effort to pick an appropriate allocation of other funds, but they don't approximate the total market very well. So a handpicked mix of the other funds is a better option, and eliminates the concern over the lifecycles being too conservative.

As far as the military messing with contributions, it sucks, but I'd imagine its a rare occurrence, and it's still worth putting up with. If the military still has their hands on you then your choices are either to contribute, or not (you can't roll over because you're still active). The tax advantage is too good to pass up while you're on payroll. Once you're out and have the option to roll over to a 401k you aren't making contributions so there's nothing for finance to mess with.

[11F]

You should be looking for only two things in an investment plan:

The ability to approximate the total market with the provided funds

Minimization of expenses

TSP allows you to approximate the total market fairly well. You could perhaps do slightly better on your own, but it would take a decent amount of effort and any benefit would be negligible in the long run.

You will not find a fund in the private sector that comes close to TSP expense ratios. Even low maintenance funds in the private sector that are widely considered to be 'great' in terms of expense ratios are ~3 times more expensive to the investor than TSP (for example: the SPY ETF). On top of that, TSP trades are free so re-balancing your account costs you nothing.

Take whatever you have in TSP and find a mix of the available funds to suit your risk tolerance (or use the lifecycle funds), and then come back every 6 months to re-balance the funds back to your ideal mix. In between that time, forget about it. At retirement your TSP account will have more cash in it than had you attempted a comparable strategy with any other private sector fund.

There is no good monetary argument for removing your funds from TSP (assuming you're still investing on a 'long term' timeline). If some buddy of yours tries to convince you that TSP is shit, make sure you educate yourself before you make the irreversible decision to withdraw from the Program. Once you pull your funds, you can't get back in when 5 years down the road you realize your mistake.

I have only one complaint with TSP, and really I'm probably just being protected from myself. I'd like to be able to sit everything in my account on the sideline as cash if I want. Financially it makes no sense, but I still find myself wanting the security of knowing I could if I wanted to. However, it's not enough to pass up the opportunity to participate in TSP. I can move my civilian sector investments to cash if I feel the need, and again, it's a stupid move anyway.

^This

[GearMonkey]

Why the f--k does DFAS make us contribute to Roth TSP in a % of base pay?  I know my desired (or maximum) annual contribution and I know how many months there are in a year, let me do the math and give the website a dollar value to contribute every month.  Dollar values stay constant unlike base pay which changes every year (part way through the year of course!).

Edited November 27, 2015 by GearMonkey

[Termy]

Amen. I have that same thought every year when I have to: look at the current pay chart, multiply by 1.3% or whatever the raise is, see if I'm getting a longevity increase, then do the math. It's so silly. 

[Homestar]

I've selected a percentage that I know will be greater than the contribution limit for the year and am counting on the TSP not allowing the "overage" amount. I guess I'll see how that works out in a month or so. It's the only way I can think of to contribute the exact max amount.