Understanding TSP

Scott Airman & Family Readiness Center256-8668

9 Financial Planning Myths

1. Financial planning is all about investing

2. I can’t afford professional financial advice

3. Estate planning is only for rich people

4. I don’t have enough money to start investing

5. I won’t need life insurance until I’m old

6. I have plenty of time to save for retirement

7. There is a secret for beating the stock market

8. My landlord’s insurance will protect me

9. Saving for my kids’ college tuition comes first

Financial Cornerstone Concepts

1. Pay yourself first and make it

automatic

2. Know your spending style

3. Understand the value of money (to you)

4. Always spend with the end in mind

Before You Invest…

• Save at least $1,000 for emergencies.

• Most financial gurus will recommend that you payoff any debts with double-digit interest first.

• Then it’s in your hands.

• The earlier you start investing, the more money you will have to invest.

Thrift Savings Plan

• Federal Government-sponsored retirement savings and investment plan established by Congress in 1986 for Federal civilian employees

• Public Law 106-398 extended participation in TSP to members of the uniformed services in 2001

Thrift Savings Plan

• A retirement savings and investment plan

• rTSP: After tax contributions

• tTSP: Taxes do not come out until you withdraw beginning at age 59½

• The money is yours whether you stay for twenty or leave early

Plan Differences

• TSP is a defined contribution plan. Retirement income will depend on how much you contribute during your working years as well as earnings.

• Uniformed services retirement system is a defined benefit program. Based on years of service and rank.

Thrift Savings Plan

Saving for your retirement has many advantages:

• Tax Deferred/After Tax Contributions

• Minimal Cost

• Catch-Up Contributions

• Multiple Fund Investment Options

• Transfer Other Employee Plans Into TSP

• Loans

• In-Service Withdrawals

• Multiple Withdrawal Options

Your TSP Asset Allocation

• When distributing your money among the TSP funds it should reflect your time horizon and your risk tolerance. Since you have many years ahead of you, you can probably afford to take some risk. That is, you can consider investing in the TSP's stock funds (C, S, and I Funds) in addition to the G and the F funds. The TSP stock funds, while more volatile, offer the opportunity for potentially higher returns over time.

Diversification

Also, by spreading your investment across the different funds, you become less susceptible to dramatic losses that might be associated with having all of your money in a single asset.

It’s the old ‘don’t put all of your eggs in one basket’ concept.

Thrift Savings Plan

FERS Employees have additional advantages:

• Agency Automatic Contributions (1% of basic pay)

• Matching Contributions (up to an additional 4%-$ for $ for first 3% and then 50% of last 2 for a total of 5%)

Who Is Eligible for TSP?

• Any member of the Uniformed Services performing duty in a pay status• Active duty members

• Ready Reserve members in any pay status

• Federal civilian employees• Created as an integral part of the FERS system

• Provides supplemental retirement income for CSRS covered employees

Enrolling in the TSP

• FERS employee--a TSP account will automatically be established as soon as your agency makes your first Agency Automatic Contribution

• AD-register to participate through MyPay.

TSP Contribution Rules

FERS Employees

• Your agency has automatically enrolled you in TSP, and 3% of your basic pay is taken from your paycheck and deposited in your TSP account, unless you stop or change it.

• Subject to the IRS deferral limit ($17,500 in 2014)

• Will also receive two types of agency contributions:

• Agency Automatic Contributions (1%)

• Agency Matching Contributions (up to 4%)

• dollar for dollar on the first 3% of basic pay

• 50 cents on the dollar on the next 2%

Don’t Lose Out on Agency Matching

Contributions

• If you are a FERS employee and contribute a percentage of pay or a dollar amount that will equal the IRS deferral limit before the last pay date of the year, you will not receive all of the matching contributions to which you would otherwise be entitled.

• If you are contributing to both a civilian and uniformed services TSP, you should be particularly careful.

The Elective Deferral Limit and Its Impact on

Maximizing Agency Matching Contributions

TSP Contribution Rules

Uniformed Services

• Any amount from basic pay subject to IRS elective deferral limit ($18000 for 2015)

• Up to 100% of incentive, special or bonus pay, subject to IRS limit

• Contributions deducted from Combat Zone Tax Exempt (CZTE) pay are tax exempt, but not earnings

• $53,000 IRS limit in tax free combat zones

TSP Contribution Rules

CSRS Employees

• May contribute any amount up to the IRS elective deferral limit ($17,500 for 2013) and up to 100% of base pay.

Catch-Up Contributions

• If you turn age 50 or older during the calendar year and

• Expect to reach the maximum contribution ($18,000 in 2015)

• Then you can make catch-up contributions (up to $5,500 in 2015)

• You must make a separate election for these contributions each year

Your First Contributions

• AD-Will automatically be invested in the Government Securities Investment (G) Fund

• Your funds will stay in the (G) Fund until you make a different choice

• FERS-Will automatically be invested in the Lifecycle fund

Benefits of TSP

• Ease of making contributions to the TSP using MyPay

• Low cost way to invest for the future

• A diversified choice of investment options, including professionally designed lifecycle funds

• A portable retirement account that can move with you when you retire or leave Federal service

Tax Advantages

• tTSP-The money you contribute to the TSP is taken out of your pay each pay period before Federal (and, in almost all cases, state income taxes are calculated).

• As a result, the amount of pay used to calculate your taxes is reduced, so less money is withheld from your pay for taxes.

Before-Tax Savings Through the TSP

Annual pay (taxable income) $40,000

Minus TSP contributions

(5% of $40,000) - 2,000

Net taxable income 38,000

Minus estimated Federal income

Tax at 25% - 4,121

Net spendable income $33,879

After-Tax Savings Outside the TSP

Annual pay (taxable income) $40,000

Minus estimated Federal income

Tax at 25% - 4,621

Net income after taxes 35,379

Minus savings (no tax advantage)

(5% of $40,000) - 2,000

Net spendable income $33,379

Tax Savings continued…

• If you contributed before-tax money to the TSP, you would have $500 more in your pocket!

($33,879-$33,379=$500)

After-Tax Contributions to the TSP

• rTSP-Earnings are tax free!

TSP Loans and Withdrawals

• There are three ways to get your money out of the TSP

• A loan (general purpose or for the purchase or construction of a primary residence)

• An in-service withdrawal

• A post-separation withdrawal (i.e., a withdrawal after you separate from service)

Thrift Savings Plan

• The TSP offers you two approaches to investing your money:

• The L Funds—these are “lifecycle” funds that are invested according to a professionally-designed mix of stocks and bonds and Government securities.

• Individual Funds (G, F, C, S and I Funds)

TSP Investment Funds

• Government Securities Investment Fund

• (G Fund-special non-marketable U.S. Treasuries

• Fixed Income Index Investment Fund

• (F Fund)-tracks Barclays Capital U.S. Aggregate bond index

• Common Stock Index Investment Fund

• (C Fund)-replicates S&P 500 index

• U.S. Small-capitalization Stock Index Investment Fund

• (S Fund)–tracks Wilshire 4500 Completion index

• International Stock Index Investment Fund

• (I Fund)–replicates MSCI EAFE index

• 5 Lifecycle Investment Funds

• (L Funds) -professionally managed investment in above funds targeted towards time remaining to invest for retirement

The L Funds

• Are designed for participants who may not have the time, experience or interest to manage their accounts.

• Choose If your target date is

• L 2050 2045 or later

• L 2040 2035 through 2044

• L 2030 2025 through 2034

• L 2020 2015 through 2024

• L Income withdrawing now

G FUNDGovernment Securities Fund

• Investment Risk:

• Low/None (US Treasury securities-T-bills, notes, bonds)

• Rate is set once a month by the U.S. Treasury

• Objective:

• Maintain higher return than inflation without exposing the fund to risk of default or market fluctuation

• Last 12 months return 2.27% (as of 1/15)

F FUND

Fixed Income Index Investment Fund

• Investment Risk:

• Low

• Objective:• to match the performance of the Lehman Brothers U.S.

Aggregate (LBA) index, a broad index representing the U.S. bond market.

• Last 12 months return

7.31% (as of 1/15)

C FUND

Common Stock Index Investment Fund

• Investment Risk:

Moderate

• Objective: to match the performance of the S & P 500 index, a broad market index made up of stocks of the 500 large to medium-size U.S. Companies

• Last 12 months return

14.32% (as of 1/15)

S FundSmall Capitalization Stock Index Investment Fund

• Investment Risk:

• Moderate

• Objective:

• to match the performance of the Dow Jones Wilshire 4500 index, a broad market index made up of stocks of US companies not included in the S&P 500

• Last 12 months return 7.86% (as of 1/15)

I FUND

Internat’l Stock Index Investment Fund

• Investment Risk:

Moderate Aggressive

• Objective:

to match the performance of the Morgan Stanley Capital International Index, a broad international market index, made up of stocks of companies in 21 developed countries.

• Last 12 months return

(.10%) (as of 1/15)

Initial L Funds Investment Allocation

L 2050

L 2030

L 2040

L 2020

L Income Fund Investment Allocation

• When each L Fund reaches its target date, its distribution will match the L Income Fund investment and it will “roll into” the L Income Fund

• A new L Fund will be introduced when an L Fund reaches its target date

What is a “Roth” TSP?

• A Roth TSP account is similar in tax treatment to a Roth Individual Retirement Account (IRA)

• Roth IRAs were established by the Taxpayer Relief Act of 1997 & named for Sen. William Roth of Delaware

• Contributions to a Roth TSP are not deductible

• Contributions are made after-tax (does not reduce your taxable income)

• “Taxed now, tax-free later”

• A Roth TSP IS NOT THE SAME as a Roth IRA

Traditional TSP Vs. Roth TSPTreatment

OfTraditional TSP Roth TSP

Contributions Pre-tax After-tax

Your Paycheck Taxes are deferred, so less money is taken out of your paycheck.

Taxes are paid up front, so more money comes out of your paycheck.

Transfers In Transfers allowed from eligible employer plans and traditional IRAs

Transfers allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s

Transfers Out Transfers allowed to eligible employer plans, traditional IRAs, and Roth IRAs

Transfers allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs

Withdrawals Taxable when withdrawn Tax-free if 5 years since Jan. 1 of the year you made your 1st Roth contribution, AND age 59½ or older, perm. disabled, or deceased

Source: www.tsp.gov

Roth TSP vs. roth ira

Roth TSP Roth IRA

Income Limits Available to all participants regardless

of income

Not available to taxpayers with income above certain

limits

Contribution Limits

$18,000(plus an add’l $5,500 if at least 50 yrs of age)

$5,500($6,500 if at least 50 yrs of

age)

RequiredMinimum

Distribution (RMD)

RMD apply to both Roth & Traditional balances

Not subject to RMD until the IRA owner dies

Rollover Rules Can be rolled into another Roth 401(k) or

a Roth IRA

May not be rolled into a Roth401(k); a Roth IRA can

ONLY be rolled into another Roth IRA

Source: www.public.navy.mil

What are the fees charged?

• Your share of TSP net administrative expenses is based on the size of your account balance. • For example, the G Fund’s expense ratio for 2015 is .028%.

Therefore, if you invested in the G Fund in 2015, earnings are reduced by 29 cents per $1,000 of your G Fund balance.

Source: www.tsp.gov

TSP Expense Ratios since 1998

Costs Matter. A Lot

• Every dollar you pay in fees reduces the returns you get to keep.

• Example:

• $10,000 $10,000

7% annual return 7% annual return

.63% expenses .028% expenses

20 years 20 years

$34,386 $38,495

A sizeable difference of $4,109!

What do I need to consider?

• The key factor in deciding whether to choose the Roth option is predicting whether taxes will be higher or lower at withdrawal.

• The main uncertainty for Roth is how tax rates might change between now and retirement.

• Contributions to the TSP from tax-exempt pay earned in a combat zone to the Roth TSP will not incur tax on either the contributions or the earnings.

Roth or not…invest!!!

Bottom Line

•70% of Americans live paycheck to paycheck.

•More than 41% of Baby Boomers have less than $25,000 saved for retirement.

•The projected year in which Social Security will be exhausted is 2042.

•SECURE YOUR OWN FINANCIAL FUTURE!

Navigating the TSP Website

https://www.tsp.gov/participantsupport/orientation/orientationTrailer.shtml

Internet Resources

• www.morningstar.com

• www.fool.com

• www.cnnmoney.com

• www.militarymoney.com

• www.choosetosave.org

• www.tsp.gov

• www.mypay.gov

Scott Airman & Family Readiness

Center

256-8668