4 Good Things About the Thrift Savings Plan

And 3 Not-So-Bad Problems

What do you do when someone says, “I’m not a believer in the TSP.” I can’t believe it when I hear something like that. I’m thinking, “Are you kidding me?”

4 Good Things About the TSPSomeone who utters such a phrase probably thinks the Thrift Savings Plan is not a good savings vehicle based on his own investing philosophy. I say “his” because I’ll bet you dollars to donuts that it will be a guy who thinks he knows how to invest better without the TSP. In my experience men are less likely to readily admit what they don’t know as investors. And that’s the thing. This guy doesn’t know what he’s talking about, in my opinion.

TSP Benefit #1: Diversification

Maybe he’s not a believer in widely diversifying his investments in order to reduce risk. When you own the TSP’s C Fund you own the 500 largest companies in America including Apple, Google, Exxon, Coca Cola and the like. Owning the S Fund gives you exposure to nearly all of the other publicly traded U.S. companies, about 4,500 of them.

TSP Benefit #2: Low Fees

Maybe he’s not a believer in low fees. The mutual fund companies have to make a profit somewhere. They scrape a little bit off your investment every year to pay their bills, and that reduces the performance of your investment. The average expense ratio for the TSP is less than .03%. That’s less than $3 for every $10,000 you have invested in the TSP. Even the best mutual fund families charge about 2 to 5 times that. Some charge even more, upwards of 1%. That’s over $100 a year to do the same thing the TSP is doing for $3. I don’t know about you, but if I get to choose between paying $3 or $100 for the same thing the answer is obvious.

TSP Benefit #3: Tax-deferred or Tax-free Growth

Who likes to pay taxes? When you invest in the TSP you take advantage of tax-deferred growth. You don’t have to pay taxes every year on the dividends or capital gains that your investments produce. So: taxes, or no taxes? Take your pick.

That’s not to say the TSP is tax-free, but for many service members it can be. There are two options for the TSP: traditional and Roth. If you save in the traditional TSP, you reduce your tax burden today. Then you pay income tax on everything that comes out when you withdraw from your TSP in retirement. If you invest in the Roth TSP, there is no immediate tax break. But you won’t pay taxes on the growth of your investment, nor will you pay taxes on your withdrawals when you retire.

The Roth option is usually a good choice for service members because of the low tax burden you have while in uniform. For many service members, tax-free allowances such as BAH and BAS make up 25% to 40% of their gross pay. There are a number of factors to consider, but in such a low-tax situation it usually doesn’t make sense to put your savings into the traditional TSP, and then pay taxes on all of it when it comes out.

TSP Benefit #4: Easy and Automatic

How many forms, disclosures, and risk assessment questionnaires do you have to fill out before you invest in the TSP? Zero, zip, zilch, nada. It’s easy peasy to set up or change your automatic TSP savings. Once you get on MyPay, you can do it in less than a minute. In addition, your TSP allotment is calculated by percentage, so when your pay goes up, so does your savings. Most service members will get 6-8 pay raises in their first 4-5 years, so automatically increasing your savings as well is important.

TSP Limitations

Not everything is perfect about the TSP, but if you ask me, that only comes into play if you have too much money. That’s right, almost everything wrong with the TSP only becomes a factor when you have a boatload of money.

Limited Fund Choices

There are only 5 fund choices in the TSP. They have the phenomenally unimaginative names of C Fund, S Fund, I Fund, F Fund, and G Fund. The L funds, or Lifecycle Funds, are just different mixtures of the same basic 5 funds. When you invest in all 5 of the funds, or one of the L funds, you own a part of nearly the entire U.S. stock market, nearly all of the U.S. bond market, and the largest companies in 22 developed countries in Europe, Asia, and Australia.

That sounds like you’ve covered all the bases, so what’s missing? Investors with a lot of money might want to diversify even further by investing in real estate stocks, foreign bonds, high-yield bonds, or emerging markets. While these sectors are missing from your choices in the TSP, they should each be only a small portion of your portfolio. That means you likely have a whole bunch of money saved for retirement already if you’re looking to invest in those sectors. It’s easy enough to open an IRA to do that, in addition to a core portfolio in the TSP.

Early Retirement

One big complaint I often hear about the TSP is that you can’t withdraw the money until you are 59 ½. Guess what: that’s true for all tax-advantaged retirement accounts whether it is an IRA, 401(k), or 403(b).

Who needs to worry about that anyway? Well maybe you have a goal to retire before 59 ½. You are a serious saver, and you have more than 3 or more times your annual income saved for retirement already. That’s great, but I don’t see that as a “problem” that most people have.

Investing by Percentage

Some people don’t like that you can only invest by a percentage of your pay, rather than a dollar amount. The people most worried about this are the ones trying to max it out for the year. For 2015, the maximum contribution, unless you’re in a combat zone, is $18,000, or $1,500 per month. It’s nearly impossible to hit that exactly using a percentage of your pay, so maybe you’ll only put $17,912.88 in your TSP. “Missed it by that much.

Who needs to worry about that? People who can put away $1,500 a month. Let’s just leave that as another “good problem to have.”

What’s your problem with the TSP?