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Thrift Savings Plan

The federal Thrift Savings Plan allows participants to place a portion of their monthly pay into an account similar to a 401(k) investment plan for private-sector workers. The contributions are in pretax dollars and thus reduce the amount of income subject to tax, and the accounts grow tax-free. There is now no limit to the percentage of income that can be invested in the accounts.

However, the Internal Revenue Service sets a dollar limit for how much can be invested each year; in 2007, that limit is $15,500. Anyone age 50 or over can contribute an additional $5,000 to the TSP as a catch-up payment if contributing the maximum allowed from their pay.

Enrollment is available when members first join the military and any time thereafter. In the past, participants could open new accounts only during federal “open seasons,” but these were eliminated in 2005.

Unlike traditional military retirement, which requires a commitment of at least 20 years of active duty, money invested in the TSP belongs to individual members no matter how many years they serve.

Taxes

Income contributed to the TSP is not taxed until withdrawn from the account. Withdrawal before age 59½ may be subject to penalty; however, the TSP account can be rolled over into an Individual Retirement Account or another employer’s retirement account, or the money can stay in the TSP after a member leaves the military.