Why I love the TSP
The Thrift Savings Plan (TSP) is one of the most powerful tools you have as a member of the military to help you make your financial independence and early retirement (FIRE) a reality. The TSP fills the same role as a 401(k) at most private organizations. It is funded through voluntary payroll deductions and has a contribution limit of $18,000/year. However, there are a few striking differences.
First of all, the TSP offers lower expense ratios than any fund I've seen available for individual investors or from any of my non-military friends' 401(k) providers. Generally, the gold standard of low cost investing is Vanguard (who I use for my IRA) because their expense ratio is 0.05% for their cheapest S&P 500 index fund with a $10,000 minimum investment. The TSP automatically gives an average expense ratio of 0.038% even in their "managed" Lifecycle funds.
Why do expense ratios matter? The answer is compound interest. If the market grows 7% but the mutual fund you use to track its growth charges you 1% to manage your money, you only earned 6%. With the TSP's expense ratio of only 0.038%, you would have realized 6.962% gains. In a portfolio of $100,000, that's a difference of nearly $1,000. The following year, you would have an additional $962 in your account earning you money.
The second reason I love the TSP is the tax benefits. With the TSP, unlike many 401(k) plans, you have the option for both Traditional and Roth contributions. Traditional contributions are made 'pre-tax' and then you pay taxes on them upon withdrawal of the funds (along with return on investments). Roth contributions are made 'post-tax'. That means you use money that you have already paid your taxes on, then the money, along with any returns, is never taxed again. Depending on your personal tax situation, Traditional or Roth contributions may be best for you, but it's great having the option to make both.
The third reason I love the TSP is how simple it is. You can update your contributions through mypay. You have the option of 5 index-style funds based around US Large Stocks, US Small Stocks, International Stocks, Income Maintenance, and a special class of US Bonds. You also have access to target date style Lifecycle funds that don't charge any premium for their automatic rebalancing.
The TSP also has some benefits when you are deployed in certain countries. Instead of the $18,000 maximum annual contribution, you can contribute up to $54,000. If you are in a tax-exempt zone and contribute to your Roth TSP, you will have a $54,000 balance of money that was initially taxed at 0% and will remain taxed at 0% forever.
Lastly, you can use your TSP to help yourself purchase a home. The TSP offers loans that can be used for real estate purposes. I recommend against using a TSP loan since you can miss out on significant market growth, but if you want to save for a house and not miss out on your tax advantaged retirement account space, it can make sense to max your TSP, take a loan for your home down payment, then repay the loan. This ensures you made the full contribution every year that you had access to the TSP and you were able to save for a house downpayment (though, since we're all in the military here, we have the VA loan which doesn't require a down payment).
In conclusion, the TSP is one of the most powerful weapons in your early retirement arsenal and should be one of your top 2 or 3 priorities when building your savings goals. Your TSP and a military pension alone could afford you a retirement many Americans can only dream of for decades. Adding an IRA, taxable brokerage accounts, and smart real estate investments could lead to long term riches. Make sure you take full advantage of this awesome benefit.