Changes to the Thrift Savings Plan

Currently the Thrift Savings Plan (TSP) acts similar to a traditional Individual Retirement Account (IRA) in regards to the tax benefit.  TSP is currently working on phasing itself to provide a Roth benefit to TSP accounts which will make the accounts act similar to a Roth IRA.  Marines are currently able to take advantage of this transition.  Starting July 2012 civilian federal employees will be able to take advantage of the program.  Soldiers, Sailors, and Airmen will begin taking advantage of this program starting in October 2012.

For information on the Pros and Cons of traditional and Roth, please see the blog about IRA accounts.  Additionally consult with your accountant to see if the conversion is appropriate for your retirement goals.

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Individual Retirement Accounts (IRA)

How would you like to save money and keep Uncle Sam’s hands off of it?  Individual Retirement Accounts (Commonly referred to as IRA) are a great way to plan for the future while sheltering your savings from the tax man.  There are two common types of IRA accounts, the traditional IRA and a Roth IRA.  Both accounts have benefits and there is no simple answer as to which one is best for you. 

A traditional IRA allows for contributions of up to $5,000 a year.  Contributions made to your IRA account are tax deductible.  All earnings made within your IRA account are deferred until you make withdrawals from the account at which time you will pay the taxes on the amount of money withdrawn from the account. 

The Roth IRA also allows for contributions of up to $5,000 a year.  Where the two accounts differ is how the account is taxed.  Roth account contributions are not tax deductible.  But like the traditional IRA, the earnings within a Roth IRA are shielded from taxation.  Additionally, when deductions are made from a Roth IRA, they too are tax free. 

For those of you who are late bloomers on saving for retirement, you are in luck. An additional $1,000 in contributions is authorized for those ages 50 and up.

With both programs offering great benefits, there must be a catch right?  Well the catch is the simple; you can’t touch your money. Well that is until you are 59.5 years old.  I know some of you who were skeptics about IRA’s are now losing interest but please remember it is a retirement program and there are always exceptions to the rule.  Some of these exceptions are purchasing a home, having a disability, medical expenses, and long term unemployment.  If you don’t meet one of these exceptions and need to withdraw money prior to 59.5 years of age, you are still able to do so, but at a price.  You will be taxed on the amount of money you have withdrawn at your tax rate, and incur a 10% fee for the amount withdrawn.

So you have made the decision to start saving for your (and your family’s) future, but don’t know where to start.  The easiest place is to make an account is with your favorite financial institution.  Many investing firms offer both traditional and Roth IRA accounts that are easy to start online.  Each firm offers different rates for trading.

From my personal experience with talking with fellow Soldiers of all ranks, finding $5,000 to contribute to an IRA account is difficult.  The reasons I receive for why they can’t start saving are all too common.  If you are thinking of a reason now, I am sure I have heard it.  But you need to start saving for your future, because no one else is going to.   When I was a junior enlisted Soldier I couldn’t afford $5,000 a year.  Instead I could afford about $100 a month and created an allotment to save automatically.  A few months later I received a promotion, a pay increase of about $50 a month.  So I increased my allotment to reflect my pay raise.  After a few years and several pay raises later, I was able to get my monthly allotment to $400 a month.  You can establish an allotment with MyPay to have the funds sent directly into your IRA account.

Please consult with your accountant for advice unique to your situation.

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