Listen to The Military Money Manual Podcast on Spotify, Apple Podcasts, Amazon Music, Audible, YouTube, or Stitcher.
Episode 100! Big thank you to all of the listeners and supports of the podcast!
In this episode, Spencer and Jamie go on a journey through the first two years with a Thrift Savings Plan or TSP. If you are new to the military or know anyone new to the military, this one is for you!
Military Money Manual Podcast Episode #100 Links
- Free 5-day course to maximize your travel benefits and learn all about military travel hacking
- The Military Money Manual book
- Thrift Savings Plan | Military TSP – Everything You Need to Know | Military Money Manual Podcast Episode 02
- tsp.gov
Outline of Episode:
Military Money Manual Podcast Episode #100
[00:00:00] Spencer: You now own a small piece of every publicly traded company in America, which is awesome, which is huge. And I don't think a lot of people recognize that when they say “Oh, I own the C and the S fund.” Think about what's actually inside those funds. It's not just numbers on a screen.
It's an Apple Store employee in New York City who just sold the new iPhone for $1,500.
I'm Spencer Reese from militarymoneymanual.com joined today by Jamie.
Hey Jamie.
And we are sitting here on the beautiful island of Lana’i, little business trip, little corporate retreat for the Military Money Manual podcast.
And we're recording a couple episodes in person. Very excited about that. Yes.
In this episode, we're going to take someone who just joined the military, whether you're enlisted or commissioned, we want to take you through your first two years with a Thrift Savings Plan or TSP. I know I ignored the TSP for a long time when I first joined the military because I didn't understand it.
And if someone had sat me down and had explained it to me, I think I would have realized what a great deal it was. And I would start investing in it a lot earlier.
[00:01:28] Jamie: Yeah, I remember starting out, I think maybe a year or two after active duty for me, I started with maybe a $50 contribution or something because someone told me you should be contributing to it, probably just in passing or I saw an article or something like that.
So I knew I needed to start but didn't really know what to do with it. So I didn't really have any guidance on where to go.
[00:01:49] Spencer: Yeah, I knew what an IRA was. I knew what a Roth IRA was, I was investing in that, but I, and at the time I wasn't in BRS, right? I wasn't in the Blended Retirement System.
But now anybody who's joined the military after 2018 is in the Blended Retirement System. And so congratulations, you get matching on your TSP contributions. And in fact, you're going to get automatic TSP contributions, they're just going to be taken out of your paycheck and put into your TSP account. So it behooves you to understand where your money is going, right? And how you want to invest it.
Now, if you're an old timer listening to this, you're going to remember the old TSP system. When you contributed, it automatically went into the G fund and that wasn't such a great deal. We'll get into that a little bit later in the podcast, but the new system is a much better deal for our military service members and everybody has to participate if you're in the Blended Retirement System. So it makes sense to understand the TSP because you're a participant.
[00:02:45] Jamie: It affects everyone. So we're going to talk today about some of the basics of the TSP. What it is, what is the Blended Retirement System, where does money come from, whether it's from you or from the federal government.
What types of funds are available and maybe some strategies for how you can increase your investing potential over the years, whether you do a two year career or a 20 year career.
[00:03:07] Spencer: So Jamie, what's the difference between somebody in the reading the news or might hear about an IRA or a 401k? Where's the TSP fit into the investing universe?
[00:03:17] Jamie: So when you hear TSP, it's Pretty much like a 401k. It is an employer sponsored retirement plan, an IRA, whether it's Roth or traditional. A lot of times people think an Roth IRA is its own thing and it is, but it's just a flavor of an IRA, Individual Retirement Account. You put your own money into that arrangement.
The I R S has certain benefits for that. You will have certain benefits for contributing to that over your lifetime. But the 401k or the TSP, the Thrift Savings Plan, is employer sponsored. That means it's through your company, your spouse or your cousins or anyone that's not in the military would go to HR to talk about their company's 401k and what funds are offered and things like that.
All of that is the TSP for people working for the federal government, like you military service members.
[00:04:04] Spencer: Yeah, and Jamie, you mentioned that there are two different flavors of IRA. There's also two different flavors of the TSP, right?
[00:04:11] Jamie: Absolutely.
The two big flavors, if you want to think of them that way, are the Roth or traditional.
It just impacts when you pay the taxes and how your money grows and then is taxed or not taxed later on in the future. So if you're looking at Roth contributions in the TSP or in your IRA, it's the same thing. This is named after the senator that passed the legislation for this. So a Roth fund will give you the ability to pay taxes now.
And then it grows tax free and then when you pull the money out at retirement you don't pay any taxes on all that money where a large majority of that at a traditional retirement age is going to be growth. And you don't pay any taxes on the growth of those dollars because you pay taxes on them today and then 40, 50 years from now you take it out tax free.
[00:04:55] Spencer: And then the other one is traditional. So you're going to. You get tax benefits today, you pay your taxes in the future, so you don't have to pay your taxes now and that might be beneficial if you're expecting to have a lower taxable income or lower tax rate in retirement, which it depends if you're a high income earner, let's say you're making, quarter million or a half million dollars a year, you can probably make a pretty safe bet that your tax rate in retirement is going to be lower than what you're currently making.
But if you're in the military, we have the advantage that most of our income is tax free. Plus, with the standard deduction and everything else, military service members have a very low effective tax rate. So for 99 percent of military service members, especially if you just joined, you just enlisted, you just commissioned, The Roth TSP is going to be better for new military service members.
So I recommend that military service members make their contributions to the Roth TSP account.
[00:05:53] Jamie: And then the last basic that I want to cover is that inside of the TSP, it's really just like a bank account if you want to think of it like that. You still have investment vehicles or options inside of your Thrift Savings Plan.
So it's not enough to just send money to the TSP. without knowing where it's actually going. And so we're going to talk about that in a few minutes, but it's just an overarching theme with a lot of options underneath for how you actually employ and invest your money.
[00:06:18] Spencer: Okay, so let's take someone who just commissioned or enlisted in the military and let's take them through the first two years of their participation in the TSP plan.
Jamie, what's happening day one?
[00:06:31] Jamie: So on day one, for anyone that joined after October 1st of 2020, The military is automatically going to enroll you in the TSP Lifecycle Fund at 5 percent contributions. And it's funny because now you can opt out of that 5%, but now the military is going to re-enroll you at 5 percent every January 1st.
So it just goes to show you how important it is to at least get something there. And 5 percent is a good starting point for a lot of people that the military automatically enrolls you there and then wants you to be there again. If you ever turn it off every January, every calendar year, they're going to reset you at 5%.
[00:07:07] Spencer: Yeah. So for most people, like their first day in the military, it's probably at basic training, right? Some kind of basic military training we call it BMT in the Air Force or bootcamp or whatever. If you commission, you've probably completed all of your initial military training during your schooling during your college, or you went to OTS or something Officer Training School And so maybe if you're in boot camp, you probably don't have access to a computer to go create a TSP account But once you do have access to a computer or if you just commissioned and you have time you can go to TSP.gov. You can create an account and once you have a TSP account you can log in there, you can adjust how your money is allocated, where your funds are going, when TSP gets money from your paycheck, and then you can log into MyPay, which is the Defense Finance Accounting Service, or DFAS.
They're the guys who pay all of us, whether you're an Army, Marine, Navy. Air Force, you get paid through DFAS. The website, it's called MyPay, you can just Google it, it'll pop up, MyPay Military, and you can adjust the amount that you want to contribute and make any changes to your contribution, whether it's Roth or traditional contributions, you can make that through the MyPay website.
[00:08:25] Jamie: So eventually you'll need two accounts, one for tsp.gov and then your MyPay account. TSP is more for monitoring and making small adjustments inside of your account, but thinking more of statement balances. And MyPay is, you set the percentage you want of your pay, percentage of your basic pay, percentage of special pay, and whether you want it to Roth or traditional contributions.
That's all done in MyPay.
[00:08:46] Spencer: Okay, Jamie. So this takes us to day 60 now, which is another milestone in your first two years participating in the thrift savings plan. And this is when automatic 1 percent contributions kick in under the Blended Retirement System or BRS. So that's money that does not come out of your pay.
That is also known as an agency contribution. And basically, the Department of Defense says we are automatically going to kick 1 percent of your pay from a different pot of money. It doesn't come from your paycheck. So if you're paid $1,000 a month They're going to put $10 a month into your BRS just as your 1 percent on a Mac contribution that starts on day 60.
Then after 24 months now you finish your first two years in the military you are eligible to start receiving matching and what the matching does is it adds an additional 4 percent of your basic pay up to a total of 5 percent. So the 1 percent automatic you always get that whether you're contributing to your TSP or not, but if you want to get that additional 4 percent of matching, you have to contribute at least 5 percent of your base pay or special pay or whatever.
But you have to contribute 5 percent of your pay to the TSP in order to get the full agency matching.
[00:10:03] Jamie: Yeah, remember you can contribute more than 5%, which eventually you might want to work up to, but 5 percent if you're brand new to the military is a great place to start. Don't limit yourself to that even though you only get a 5 percent match.
And remember, the percentages are also based off of your base pay. So even if you get BAH, BAS, incentive pay for your career field or anything like that, it's only based off of a percentage of your base pay.
Okay, so this money is going in from me and from the agency. Now, Spencer, do I actually get to keep all of that money?
I've heard a term called vesting. When am I vested in my contributions?
[00:10:38] Spencer: Yeah, so vesting means that you as a participant in the Thrift Savings Plan, the TSB, you're eligible to keep all the money from your accounts when you leave your job. For military service members, All of your contributions are automatically vested.
Anything that you put into the TSP, you get to walk away with at any point in time when you leave the military. Even if you only, I don't know, some crazy thing, you enlist and you only serve a year, you're still going to keep all of your contributions over that year. The 1 percent auto contributions, which start on day 60, You're eligible to keep those after two years of service and then the additional four percent matching contributions.
You're eligible to keep those Immediately, but remember that you don't get those four percent additional matching contributions until you've been in for two years of service. So you can think of it as okay. I get it immediately, but I already served two years. So basically vesting for anything that the DOD is kicking into your account not out of your paycheck, but on their own behalf, you're going to have to wait two years to get that
READ MORE 👁️ https://militarymoneymanual.com/ep100/
