Help a Reader: Thrift Savings Plans

Here's an email I recently received from a reader:

I am not sure how familiar you are with the Thrift Savings Plan but I have a couple questions about the military TSP. Everyone (all financial planners on TV and radio) talks about 401k and employee matching. Since my TSP is not matched by my employer how would you recommend I contribute to it. My wife and I have no kids, and no plan to ever have them. We live in government housing so we pay no rent or mortgage. We have roughly $12000 in debt, $7000 on a card at 4% and $5000 on a 0% card. We both put $4000 to Roth IRA's and currently put 30% to my TSP. We can afford to do 49% which would get the max of 15000 in my TSP, but would you suggest contributing to the TSP or mutual fund or stocks?

I don't know anything about the TSP. Does anyone out there have some knowledge/thoughts for this reader?

Update: A reader just emailed me these links for those of you wanting to know more about the TSP:

• What is the Thrift Savings Plan?
• Which is Better, The TSP or an IRA?
• Advantages to the TSP
• Disadvantages to the TSP

Comments

[Ryan S.]

The TSP is basically a 401K for military/government employees. You are only allowed to choose 5 funds, G,F,C,S,I (savings account, bonds, large cap, small cap, international). Civilian employees get a 5% match, military gets nothing because they have a pension program instead. Two transfers between funds are allowed per month.

First, I'd up both of your IRA's to $5,000 each, instead of $4000. Then I'd increase contribution percentage as you get raises.

[Jeremy]

Ryan is correct. You can diversify your TSP investment among five different investment funds: the Government Securities Investment (G) Fund, the Fixed Income Index Investment (F) Fund, the Common Stock Index Investment (C) Fund, the Small Capitalization Stock Index Investment (S) Fund, and the International Stock Index Investment (I) Fund. Although I think soon (maybe already?) there will be the new Lifecycle (L) Fund option.

Their time horizon and risk tolerance will dictate how to allocate the TSP. I'd probably do the lifecycle if that was an option and if they want simplicity, otherwise a core-satellite strategy holding primarily the stock index, and then rounding out the allocation with the appropriate amount of international, small-cap, and bonds, depending on age/risk considerations. Either way, if you can max it out, great, but like Ryan said, the limit on IRAs is $5,000 this year, so I'd bump those up as well.

[Patrick]

I see the question as this:

Which is better, maxing out a Roth IRA or TSP (similar to a civilian 401(k) plan). You are putting in $4,000, but it appears you could max it out. I would recommend doing that, then working on your other tax deferred plan - the TSP.

The next question is whether to max out the tax deferred plan (TSP) or invest in after tax investments.

The answer to this depends on your goals. If you don't need the money until retirement, then the TSP is a great option. The investments are basically index funds at incredibly cheap expense rations (cheaper than Vanguard).

If you foresee needing the funds in a few years (to buy a house, go on the vacation of a lifetime, or whatever else), then you may wish to put it in after tax investments so you can have access to it. If you choose after tax investments, I recommend index funds over mutual finds or stocks.

There are a few advantages and disadvantages to investing in the TSP, but they are too numerous to list here. (I forwarded the links to FMF to share with you if he wishes).

Good luck, and thanks for serving.

[Sam]

I'm on active duty with the Air Force (18 years) and also contribute to TSP and a Roth. The first thing you need to do is get rid of that credit card debt. Assuming you don't use the cards anymore, it will take years to pay them off if you're paying the minimum each month. Even with a 0% interest rate, do you really want to carry around debt like that? Once you pay them off, then resume your TSP and Roth contributions.

Getting a Roth with a low cost fee company such as Vanguard is a good idea. TSP currently doesn't offer a Roth style tax free option unless the money goes in tax free. The only time that will happen for you is if you deploy to a combat zone. Balancing a Roth with TSP is a good idea unless you have some guesstimate what tax bracket you'll be in at retirement. I balance by contributions between maxing out the TSP ($15.5K) and my Vanguard Roth ($5K) every year.

As far as regular tax deferred contributions go, TSP is the best you will find anywhere. Their expense rations are about .04%. Don't bother with a conventional IRA outside of the TSP, you'll pay more in expenses. I do encourage you to ensure you put your money in one of the TSP Life Cycle funds unless you periodically re-balance your portfolio for age/time risk. Too many people either keep the money in the default govt funds or have everything in the C/S/I funds. Depending on how long you have until retirement, having everything in stocks is very risky. The Life Cycle fund is already balanced and will periodically readjust to a lower stock/govt security ratio as you get closer to retirement age.

I commend your desire to max out your Roth and TSP each year. I know it's hard to do but you will be a lot better off financially by paying off the credit cards, building a cash reserve so you can pay your bills in full each month, then resuming your TSP/Roth contributions.

I was doing the exact same thing you're doing now, about 6 years ago. I'm a lot more financially secure now with $0 credit card debt than I was trying to balance credit cards and retirement contributions.

Sam
First Sergeant
Hill AFB, UT

[Trent D.]

If there is no match involved, I'd pay off your $12,000 of consumer debt first, before contributing.

I'm not sure why you're contributing such large amounts to retirement (with no match) while you're still in debt.

The 4% you're currently paying on your $7000 debt is eating up most of the profits you'd make from investing - get that balance paid off so interest starts working FOR you, not AGAINST you.

The $5,000 at 0% isn't a big deal - I'd pay the minimum on that and save up a chunk of money so that right before it clicks over to the standard APR, you could pay it off in one chunk. That way you make at least a bit of savings account interest on the $5000 while waiting for the 0% to expire, then pay it off before any finance charges accrue.

Get rid of that debt, and use the extra money to invest!

[Jeremy]

I have to disagree to some extent about the debt. Sure, nobody wants to carry around debt, but at 4% and 0%, you're actually saving more money by maxing out your TSP. If you're reducing your taxable income by $15,500 by contributing to the TSP, at a 25% tax rate, you're effectively saving close to $4,000 in taxes you'd otherwise be paying. If your 7k balance remained the same and cost 4%, you're only paying $280 in interest for the whole year. Plus, you're putting 15.5k to work sooner, which just gives it more time to compound. This will be significant over time.

That being said, you should have a plan in place to pay down that debt in a reasonable amount of time, and don't drag it out for a decade while paying the minimum. But as long as your rates remain what they are now, I wouldn't sacrifice the ability to save thousands in taxes to save a couple hundred dollars in interest. Of course, if rates go up, this would place more importance on getting the debt paid off for sure.

But as long as you keep spending under control and stop putting money on the cards, and you're making an effort to pay everything off in the next couple years while being able to max out your investments, that is very reasonable.

[Sam]

I have to disagree with not being more concerned about the CC debt. That debt is undoubtedly affecting the person's credit scores. The credit scores affect everything from rates on loans to car insurance and that will linger until at least the CC debt is reduced or eliminated. I wonder if they have any car loans? I hate to generalize but people with high debt usually have low credit scores and that will hurt you financially for a while.

The savings he will be getting by deferring income is partially offset with the CC interest and higher rates on other things due to a lower credit score. Also, if the person has $12K in debt, they most likely have no cash reserve and are vulnerable to generating even more debt if an emergency or other unforeseen expense should arise. Then they're in even more debt. Not a good trade off in my opinion.

I would rather pay off debt, improve credit scores, establish a cash reserve, then contribute to retirement and reduce the tax bracket. I doubt the person is taking that "tax savings" and earmarking it for any of those purpose. It just gets spent with the rest of the income.

[Skott]

Is the 0% card on an introductory period only, or is that rate permanent for the life of the balance?

Either way, I suggest keeping your contributions steady until the debts are paid off, then increase TSP to the maximum amount.

If you are unsure about asset allocation, the lifecycle funds are not a bad investment. For me personally, they are too conservative, but I am still in my 20's.

The low expense ratios are the main reason why I love my TSP. I don't know of any fund out there that has lower costs.

[Ryan S.]

One thing I have learned during my life is that it is great to have low interest debt, but too much debt, whether it is low or high interest, is still a burden.

[No Debt Plan]

I, too, am concerned about the debt. You have no rent/mortgage and you're still in debt? Huh?

It isn't a problem -mathematically-. As others have mentioned with the interest rates you are getting, it makes sense mathematically to pay off slow.

However, it is a red flag for me that you don't have priorities straight. If you've gone into debt now, you're likely to do it again. It's setting up a bad habit.

I would wipe out the debt and put my retirement savings on hold for now. You could have the debt paid off in a year, and adjust your life style so that you never go into debt again.

[JK]

It sounds like you have some promotional rates on your Credit cards, and for these I would set up an auto pay plan so that they will be paid off at the end of the promotional period, or over the course of 1 year. $1000/mo. for a year=$12000. I would attempt to do this while still maxing out your TSP and building up a cash reserve of 3-6 months of expenses.

If your goal is to remain debt-free, keep your credit card somewhere remote (some suggest in a big block of ice, so you have to wait for the ice to melt, giving you time to decide if it is really important!), so that you don't have it available for impulse purchases.

My plan is to save as much as possible through any available investment vehicles. The market will affect everyone, but the more you save, the more you will have at retirement.

Just my thoughts...