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The Jerusalem Post

Should You Leave Money in Your Thrift Savings Plan?

 
Thrift Savings Plan (photo credit: PR)
Thrift Savings Plan
(photo credit: PR)
The Thrift Savings Plan, commonly known as the "TSP", is basically a 401(k) plan equivalent for federal government employees as well as military personnel. And just as is the case with 401(k) plans, there are a lot of questions concerning whether or not you should leave money in your Thrift Savings Plan, or roll it over into an IRA.

How Does a TSP work?

If you are familiar with 401(k) plans, then you have the basic idea about TSP's. For 2016 you can contribute up to $18,000 into the plan and there is also a catch-up contribution of up to $6,000 if you are age 50 or older. Some US government employees are also eligible to receive matching contributions. Contributions are made by employees via payroll deduction. Those contributions are tax-deductible, and the investment earnings on the account accumulate on a tax-deferred basis. Distributions taken from a plan upon retirement are taxable as ordinary income. The TSP also comes with a loan provision for active employees. As is the case with all tax-sheltered retirement plans (except a Roth IRA), you must begin taking required minimum distributions (RMDs) when you turn age 70 1/2. The TSP offers six investment options:
  • G Fund. This fund invests entirely in a non-marketable short-term U.S. Treasury security which is specially issued for the TSP. Income on the fund is comprised entirely of interest income, and there is no risk of default.
  • F Fund. This is the TSP's fixed income option. It tracks the Barclays Capital US Aggregate Bond Index, which reflects the performance of both US government securities and the US bond market. There is potential for both capital gain or loss in this account, as well as interest income.
  • C Fund. This is the Common Stock Index Investment Fund, and it is managed to parallel the performance of the S&P 500 index. Returns are a mix of dividend income and capital gains, and as is the case with all stock-based investments, there is also risk of loss of invested capital.
  • S Fund. Otherwise known as the Small Cap Stock Index Investment Fund, the S Fund tracks the performance of the Dow Jones US Completion Total Stock Market Index. The index is comprised of US companies that are not included in the S&P 500 index. Returns are a mix of dividend income and capital gains, and there is of course the risk of loss of your investment capital.
  • I Fund. The International Stock Index Investment Fund is set up to match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index. In other words, foreign stocks. Which means income is derived from a mix of dividend income and the potential for both capital gains and losses.
  • Lifecycle Fund. Life cycle funds are investments that are based on investment for a certain time horizon. The Lifestyle Fund gives you the option to invest based on retirement in 2020, 2030, 2040, or 2050. It even has an income fund for those who are already retired and taking benefits. This fund group is more complex than the others, and you can find more information on it here.
The TSP has a Fund Comparison Matrix that provides greater detail on each of the fund options.

Benefits of Keeping Your Money in a TSP

Probably the single biggest advantage to keeping your money in the TSP is that the investment funds in the plan have what are among the the lowest expense ratios available. This can have an impact on the long-term performance of your plan. However, it may not be sufficient to overcome the negatives associated with keeping the plan active.

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Benefits to Moving Out of Your TSP Account

By moving your money out of your TSP account, you'll open up far more investment options. As noted earlier, the TSP offers just six investment options, and five of those options are based on a single fund. Should you transfer the money into an IRA, you'll gain access to hundreds or even thousands of funds to choose from. You also have the ability to invest in individual securities, such as stocks and bonds. But perhaps the biggest benefit to moving out of your TSP account is that you will gain the ability to get into investment categories that are not available through TSP. For example, if you want to invest in precious metals or a real estate investment trust (REIT), there is no option in the TSP. As well, if you want to invest in certain sectors, like technology or energy, you do not have that option in the TSP. But with a self-directed IRA account, you'll have all of those options. And you will gain complete control over those investments. With a TSP, individual control is not in the mix. And with concern over the size of the federal government budget deficits, there is at least some concern that retirement plans will be either taxed or even partially confiscated. Should that happen, TSPs would be the first hit, since the plan is already controlled by the federal government.

How to Get Out of a TSP

Generally speaking, you can only move your TSP to a non-TSP account when you separate from service with the federal government. You can transfer your TSP balance over into either a new employer retirement plan, or into a self-directed individual retirement account (IRA). There is generally no tax liability connected to the transfer as long as you do a trustee-to-trustee transfer. That means that the funds will go from your TSP, directly into the new plan, without ever passing through your hands.

Investment Alternatives to a Thrift Savings Plan

If you are taking a job outside the federal government, you can roll the TSP account over into the new employer plan, as long as the employer offers one. Of course, once you do you'll be subject to all the limitations of the new plan. If it is a 401(k) plan, this can include limited investment options, as well as investment expenses that are considerably higher than what are offered by the TSP, or by a self-directed IRA. For many people leaving government service, moving the TSP into a self-directed IRA will be the best strategy. Self-directed IRAs enable you to choose the trustee, the investment allocation, and the specific investments. Since there are virtually no limits on what types of investments you can hold in a self-directed IRA, you can have all of the traditional investment assets that you would in a TSP, but you can also add alternative investments, such as gold ira company, real estate (through REITs), and specific industry sectors that are performing well and that you feel are especially promising. With the national debt speeding toward Trillion - and already larger than the total US economy - as well as unfunded government liabilities well in excess of $100 Trillion, the ability to move into specific investment sectors could be critical in the years ahead. This is especially true in regard to gold, silver, energy, basic resources and real estate. These are all tangible investments that will likely outperform the general equity markets when the bill comes due on all of that debt. A TSP can be a solid place to hold your retirement money. But in the uncertain fiscal future that we face as a nation, the ability to spread your investments into alternative investments may be the best way to ensure a comfortable retirement.
This is a sponsored article. The article should not be considered as advice.