Need Money? Look to the TSP

Tips for getting the most out of your Thrift Savings Plan investments.

This is the second in a series of three columns on how to free up a little more spending money -- or increase the amount you’ll have available when you retire. Last week, we looked at life insurance coverage. Now let’s examine the Thrift Savings Plan.

First, it’s important to consider how sacrificing now can really pay off for you down the road. If you contribute $250 a month to the TSP, you reduce your taxable income by $250. This could add up to a tax savings of $50 to $75 per month. Look at it this way: You’re saving $250 every month, but reducing your take-home pay only by $175 to $200.

If you think you will be in a higher tax bracket in retirement and if you have some time for the money to accumulate a substantial amount of earnings, then you might consider using the Roth TSP option to save. Unlike regular TSP contributions, you’ll pay taxes on these now, but the withdrawals later will be tax-free as long as you meet certain conditions. Here’s more information about the Roth TSP option.

Keep in mind that even though the money you put in the TSP is set aside for retirement, it’s still your money. If you leave federal service, everything you have contributed to the TSP, along with matching agency contributions, belongs to you immediately. You can keep the funds in the TSP or withdraw them -- it’s up to you. There is a vesting requirement before the automatic agency 1 percent contribution to your account belongs to you, but even that is only three years.

This money can really add up. An employee under the Federal Employees Retirement System who saves 5 percent of a $60,000 salary (that’s $3,000 a year, or $250 a month) receives an additional $3,000 a year in agency automatic and matching contributions -- for a total account investment of $6,000. If you continue saving at that rate and earn an average 6 percent return, you’ll have more than $230,000 in 20 years. If you want to change any of the variables in this equation to see how your savings could add up, use the TSP’s online calculator.

A Word on Loans

One way to get quick money from your TSP account is to take out a loan. But remember, the simple truth is, while your money is out on loan, it’s not generating a return for you to use in retirement. You must pay yourself interest on the outstanding loan, but you’re missing growth potential. (Although I suppose if your money would have been in a fund that suffered a loss over the period of the loan, you could look at it as coming out ahead.)

Consider this: The payment on a $50,000 TSP loan would be $863 a month, assuming you’re paying the loan off in 60 months at 1.375 percent interest. That would add about $30 in interest back to your account each month.

At this rate, you would pay $1,780 in interest over the five-year loan repayment. (And TSP loan interest is not tax-deductible.) Also, you are making these payments using after-tax dollars. But the worst part of a TSP loan for some employees is they stop making contributions while making loan payments since they can’t afford both.

The TSP has more information on its website about investment options and loans.

Correction: The original version of this column said that If you think you will be in a lower tax bracket in retirement, the Roth TSP might be a good option. It's actually a good option if you anticipate being in a higher tax bracket. The column has been updated to correct the error.