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TSP for service members.

SPONSORED by the federal government, the Thrift Savings Plan, or TSP, was established in 1986 as an investment and retirement plan for federal employees. The fiscal year 2001 National Defense Authorization Act expanded the program to cover active-duty military members.

The dollar amount available to a military TSP participant upon retirement depends upon the amount of money the service member contributes to the program and the earnings the contributions make.

Service members may elect to contribute a percentage of their basic pay, incentive pay or special pay, and indicate into which fund or funds the money is invested.

Funds and Earnings

There are several funds to choose from, and participants may apply differing percentages to each. The earnings for each fund differ based upon economic factors. The performance histories of all of the funds are available to assist participants in determining where to invest their money.

The G Fund is government securities, the F Fund is fixed-income index funds, the C Fund is common stock, the S Fund is a small-capitalization stock index investment and the I Fund is an international stock index investment.

The new L, or lifecycle, funds diversify your account among the G, F, C, S and I funds. Because they provide a time-targeted, professionally determined investment mix among the individual funds, the L funds may be ideal for Soldiers who don't have the time or knowledge to devote to moving their investments from fund to fund for maximum yield in the early years and greater security as they come closer to retirement.

If no funds are specified for allocation, all funds contributed are invested in the G Fund.

Tax Benefit

The TSP offers participants an immediate tax benefit, in that the funds invested in the plan from a service member's pay are automatically deducted from taxable earned income for the year invested. That means that no income tax is paid on the funds deducted from the military salary. Also, there is no longer an "open season" system in which only designated time periods were available for TSP changes.

Enrollment and Contributions

To open a TSP account, Soldiers may visit the Defense Finance and Accounting Service's myPay Web site at https://mypay.dfas. mil. Once Soldiers sign into myPay, they can select the TSP option to start, change or stop contributions. Soldiers may also submit Form TSP-U-1 through their finance offices. A copy can be downloaded from the TSP Web site at www.tsp.gov.

As of January, there is no limit on the percentage of pay service members can contribute. However, the tax-exempt contributions to the TSP are limited by the Internal Revenue Service's elective-deferral limit, which is presently $15,000 per year and does not apply to tax exempt pay (i.e. combat pay).

While deployed in a designated combat zone, Soldiers can contribute tax-free pay to the TSP, where it will accrue tax-deferred earnings. The combat zone TSP contributions are not subject to the $15,000 IRS limit, and they remain penalty- and tax-free when withdrawn.

The IRS still limits the total amount of contributions to a plan to ,$44,000 for tax-year 2006. For more information, visit the TSP Web site.

Some Restrictions Apply

The TSP is best described as a supplemental source of retirement income in addition to uniformed services retirement pay, Social Security retirement pay and any other nest egg developed over a lifetime. It is not a savings account from which withdrawals can be made at any time without IRS tax penalty.

Although Soldiers may not make a full withdrawal of their TSP accounts while still on active duty, under certain circumstances an in-service withdrawal for financial hardship or an age-based withdrawal may be available.

Service members may contribute as little as one percent of their basic pay each pay period, and if they leave military service and enter federal civilian service, they may continue their military TSP or combine it with a civilian TSP account. Service members who simply leave military or government service may leave the contributed funds in the TSP account until they reach age 59, and withdraw it thereafter without IRS tax penalty.

Soldiers may also transfer money from eligible employer 401(k)-type plans or individual retirement accounts (IRAs) to their TSP accounts. Other withdrawal options are also available.

For additional information visit the TSP Web site or call the toll free TSP Thrift Line at (877) 968-3778.

Steven Chucala is chief of client services in the Office of the Staff Judge Advocate at Fort Belvoir, Va.
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Title Annotation:Thrift Savings Plan
Author:Chucala, Steven
Publication:Soldiers Magazine
Geographic Code:1USA
Date:May 1, 2006
Words:752
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