It’s no secret that I am a huge fan of investing in the Thrift Savings Plan (TSP). I have written several articles about how to avoid the mistakes I made as a young Marine in order to maximize this benefit. Today, I want to talk about some more advanced TSP strategies that will make you richer, faster!
If you aren’t already investing in the TSP or haven’t read my article about the basics of Thrift Savings Plan investing, you may want to check that out before reading about these strategies.
Triple Tax-Deferred Advanced TSP Strategies
When you enter a combat zone or other tax-exempt duty station, you can contribute to your TSP as usual. In fact, you can actually contribute up to $57,000 a year to your TSP while deployed, a number much higher than normal limits.
Since your income will not be taxed while deployed, you will be contributing tax-exempt pay into the TSP. As a result, you could be able to avoid taxes when contributing, avoid taxes on your earnings, and avoid taxes upon withdrawal!
I have written in much greater detail about combat pay benefits with the TSP here!
This is not an advanced strategy in terms of technical knowledge. However, it is an advanced strategy in terms of mindset.
It isn’t always easy for people to admit we don’t understand money. Sometimes the best thing you can do is acknowledge what you don’t know and invest accordingly.
In the case of Thrift Savings Plan, admitting that you aren’t a savvy investor could (literally) earn you millions of dollars!
The first 6-7 years I was in the Marine Corps, I had no idea what to do with my money once it was contributed to TSP. This money sat in the G-fund earning a minimal 1%-3% interest year over year. Barely outpacing (if at all) inflation is no way to get rich, but at least I wasn’t losing money.
I did the math last year, and I missed out on tens of thousands of dollars’ worth of interest that I would have earned if I had allocated my funds intelligently. I am currently invested in the C and S funds in an allocation percentage that is similar to the total stock market index.
*I don’t want to discuss my specific allocation for liability reasons if you follow it and lose money haha*
Lifecycle fund TSP Strategies
If you aren’t super savvy with investing or don’t trust yourself to stay the path during downturns, the Lifecycle funds are perfect for you! Simply choose the Lifecycle fund associated with the year you will begin withdrawing and never touch it again.
For example, I will turn 60 in 2050, so I would utilize the Lifecycle 2050 fund, while somebody who plans to begin withdrawing in the year 2055 could use either the Lifecycle 2050 or Lifecycle 2060 fund, depending on your risk strategy.
These Lifecycle funds automatically adjust from more risky allocations to more conservative ones as you get closer to withdrawal.
The beauty of this is that your automatic contributions will be automatically allocated, and you will NEVER have to touch your TSP again until withdrawal!
Timing the Market with Your TSP
At some point, I ended up in a Facebook group dedicated to investing in the Thrift Savings Plan. I requested to join this group because I was hoping to learn some valuable information and maybe get notified about updates.
Instead, I quickly realized that a large portion of this group was dedicated to a strange form of short-term trading, borderline day-trading in some instances.
There were daily market updates with people commenting about transferring all their money to the G-fund on days they thought the market would go down and transferring it entirely into another fund when they thought it might experience growth.
(Almost) NOBODY can outpace the market. It is extremely rare for anybody to consistently outpace the market. Even if you do manage to outpace the market, I would be willing to bet the amount of money you earn will not be worth the amount of time it cost you.
The best thing you can do is decide on fund allocation and stick to it. The market will go up, and the market will go down, and the market will go back up again. If you try to predict this, you will stress yourself out to the max and probably still end up losing in the long run.
You need to stick to your guns, and I would recommend adjusting your allocation no more than twice a year if you feel the need to mess with it. I haven’t touched my fund allocation in over two years now, and I am much happier not focusing any time or effort on it than I would be stressing and (maybe) earning a little bit extra.
The best TSP strategies are often the simplest. Don’t mess with your allocation!
Thrift Savings Plan Loans
A lot of people don’t realize that you can loan yourself money from your TSP without paying a penalty tax. You can borrow up to $50,000 or 50% of your total vested account balance, whichever is less.
There are two types of TSP loans you can utilize.
General Purpose TSP loan
- May be used for any purpose
- No documentation required
- 1-15 year repayment term
Residential TSP loan
- Purchase or construction of a primary residence.
- Requires documentation
- 1-15 year repayment term
There is a flat fee of $50 that TSP charges for administrative expenses, but it is subtracted from the amount you borrow. So if you borrow $10,000 from TSP, the amount paid to you will be $9,950.
The interest rate on your TSP loan is whatever interest the G-fund is earning on the date that the loan is processed. This loan has a fixed interest rate for the life of the loan and extremely low interest, which is awesome!
To top it all off, the minimal interest you do pay on this loan is repaid to yourself! If you borrow $10,000 at 2% interest, you will be paying yourself an extra $200 per year in interest.
The biggest downside to utilizing the TSP loan is the opportunity cost. Let’s say the fund averages an increase of 7% value every year your loan is out (the market average). If you are repaying 2% interest to yourself, then you have effectively missed out on a 5% return on investment that you would have gotten if you had just left the money in your TSP.
For that reason, I much prefer to leave my money in the TSP all the time, unless I know that my return on investment will be MUCH higher than what I could be earning in my retirement account.
Roll your TSP into A Self-Directed IRA
When you exit the service, it will become possible to roll your money into a self-directed IRA.
The benefit to a self-directed IRA is that you control where the funds are invested, and you aren’t limited to the stock market. A self-directed IRA can invest in real estate, businesses, or operate as a private lender if desired.
There are many advantages to investing with a self-directed IRA, and one of my favorites is that you’re in control. You can lend money to a fellow real estate investor, purchase tax liens, conduct note investing, and many other options.
The disadvantage(s) includes additional fees and work required. There are very few (if any) funds with lower fees than the Thrift Savings Plan. Not to mention that investing in real estate requires much more time and effort than simply letting your TSP earn interest by sitting there.
Withdrawing your TSP Early
Substantially equal periodic payments (SEPP) is a method of withdrawing money early from your TSP without having to pay the 10% penalty via one of the following methods:
- Required Minimum Distribution (RMD)
All of these methods require it to be a long-term plan. SEPP requires you to continue the chosen method of withdrawal for at least five years or until you reach 59.5 years of age. If you change the distribution method prior to meeting these required times, you will be hit with the normal 10% early withdrawal penalty.
Each of these SEPP withdrawal methods uses life expectancy and other factors to determine the amount you may receive. The results are different for each method. They are somewhat complex but worth looking into if you would like to withdraw your cash without paying a penalty! (Source)
The Best TSP Withdrawal Strategies
There are several different ways to withdraw money from your TSP, but you must begin taking required minimum distributions (RMD) no later than April 1st of the year after you turn 70.5. You may take partial TSP withdrawals every 30 days or you can take a full withdrawal.
You can choose to withdraw a specific dollar amount monthly, quarterly, or annually, and you can indicate this decision when you complete your withdrawal request. Also, you can take lump sums and withdrawal money here and there for large purchases if desired. You can even have the TSP compute a payment amount based on your life expectancy too if you would like!
If you have monthly expenses that you would like to cover, you could consider purchasing a life annuity too. Life annuities are a monthly benefit that gets paid to you every day for the rest of your life. You aren’t required to use your entire TSP account balance to purchase the TSP annuity, but the minimum is $3,500.
This is Confusing | Advanced TSP Strategies
Yes, it is. Be sure to consult with a tax professional and the TSP personnel to ensure you are making the right decisions. The beauty of the Thrift Savings Plan is that it can grow to become a huge, valuable asset with a ton of different ways to pay out and support your lifestyle in retirement!
There are so many things we could talk about from TSP Allocation, to the best contribution amount for you to make every month. The fact of the matter is that the advanced TSP strategies that work best for you will depend on your personal strategy and goals.