Military TSP and/or IRA?

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Lowcountry79
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Military TSP and/or IRA?

Post by Lowcountry79 »

Emergency funds: 6 months of expenses
Debt: 2 car Loans $22k total, mortgage $115k
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal, State (it's complicated)
State of Residence: FL me SC wife
Age:35

After years of putting down TSP I'm finally giving it a serious look. My dilemma is I am military retirement eligible in 3 years so I'm hesitant to start TSP contributions now since I won't be able to continue after separation from the military. I have a Roth IRA utilizing the 3 fund approach and my wife is contributing to her 401k up to the match.

After IRA contributions extra money is just going into savings and a small brokerage account. I'm hoping for advice on weather I should put the extra cash into the TSP with the plan to roll it into Roth IRA after separation or put the money into brokerage (taxable) account?

Thank you for your time!!
psychodoc
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Re: Military TSP and/or IRA?

Post by psychodoc »

Yes, for the following reasons:

1) TSP would add up to $18000 of tax advantaged space (more if you deploy to non-taxable zone)
2) access to G fund
3) if you are following 3-fund, the options in the tsp will allow for simplicity across accounts, since C, S, and I match up closely (sans international small and emerging) to vanguard offerings
4) after your next career, you can roll that 401k into the TSP

No, only if you are not designating this for retirement mone
sawhorse
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Re: Military TSP and/or IRA?

Post by sawhorse »

The TSP is probably the best defined contribution plan in the country. Their expense ratios are 7-8 times smaller than Vanguard! I heard that their director only makes $165,000 a year :o

Definitely start both a TSP Roth account and a TSP traditional account before you leave. You have to have at least $200 to keep the account open. I don't know if earnings or losses are included in that. According to the TSP site, you can have both types of accounts. The TSP Roth account makes sense given your current tax bracket, but there is an advantage to also starting a TSP traditional plan because I think TSP traditional plans allow you to roll future employer 401k plans into the TSP even if you are no longer an active TSP participant. That's a feature of the TSP that I've never seen in a private employer plan: You can contribute even after you separate from service.

Since you are in a low tax bracket, max out the Roth IRA account. Don't forget to take the Savers Credit if you are eligible for that.

There is also a free financial planning service through Military OneSource. It's run by the government and probably involves people on salary, so they probably don't have hidden agendas.

Thank you for your service! :thumbsup
Last edited by sawhorse on Sun Mar 22, 2015 2:40 pm, edited 1 time in total.
Twins Fan
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Re: Military TSP and/or IRA?

Post by Twins Fan »

Absolutely do both if you can.

Why were you putting down the TSP for years? You missed out on a pretty dang good opportunity to use the lowest cost option out there.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

sawhorse wrote:TSP traditional plans allow you to roll future employer 401k plans into the TSP even if you are no longer an active TSP participant. That's a feature of the TSP that I've never seen in a private employer plan: You can contribute even after you separate from service.

Do you mean roll the 401k into TSP after retiring from the future employer? I assume the advantage is the cost of managmet fees?

Since you are in a low tax bracket, max out the Roth IRA account. Don't forget to take the Savers Credit if you are eligible for that.

I've already maxed out Roth IRA for 2015 and we don't qualify for the savers credit.

There is also a free financial planning service through Military OneSource. It's run by the government and probably involves people on salary, so they probably don't have hidden agendas.

Thank you for your service! :thumbsup
Thank you for the advice and for recognition my service to our nation!
Topic Author
Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

Twins Fan wrote:Absolutely do both if you can.

Why were you putting down the TSP for years? You missed out on a pretty dang good opportunity to use the lowest cost option out there.
To be honest it was the lack of trust of having the "government" watch over my money. I realize now my flawed viewpoint but after seeing first hand how the government handles money I think you can understand my sentiment. Over the years I chose to invest the money I had into real estate. Ended up loosing more than I put in/made after the housing market crash.
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retiredjg
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Re: Military TSP and/or IRA?

Post by retiredjg »

If you have more money to put toward retirement, I would definitely use the TSP. It is the best plan available.

What happens after you separate depends on a lot of things we don't know.
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Re: Military TSP and/or IRA?

Post by Twins Fan »

Lowcountry79 wrote:
Twins Fan wrote:Absolutely do both if you can.

Why were you putting down the TSP for years? You missed out on a pretty dang good opportunity to use the lowest cost option out there.
To be honest it was the lack of trust of having the "government" watch over my money. I realize now my flawed viewpoint but after seeing first hand how the government handles money I think you can understand my sentiment. Over the years I chose to invest the money I had into real estate. Ended up loosing more than I put in/made after the housing market crash.
I can't say much, so no worries. I was active duty from 2001 - 2005 and reserves from 2007 - 2014 and never put a dollar in the TSP. :oops: :)
sawhorse
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Re: Military TSP and/or IRA?

Post by sawhorse »

Yes, you can roll over future 401k accounts to the TSP account but only if the company allows it. You cannot roll over IRA funds. CORRECTION: You can roll over traditional IRA funds into the TSP. You cannot roll over Roth IRA funds. Nor would you want to because of the liquidity of your Roth IRA contributions which you would lose if you put them in the TSP account, even the Roth TSP account.

Before you roll a future 401k into a TSP, research your state laws about protection against lawsuits. TSP, and IRA accounts for that matter, are not federally protected from lawsuits. Bankruptcy yes, but not lawsuits. But 401ks have ironclad protection against both bankruptcy and lawsuits. Some states also protect TSP and IRA accounts, some give partial protection, some none.

As it is, definitely open both Roth and traditional TSP accounts with a minimum of $200 in each, hopefully more, before you leave service. With your current income bracket, it makes sense to put most of your contributions to the Roth TSP and only enough toward the traditional to keep it open after you leave. I don't know if the $200 refers only to initial contributions or whether it has to stay above $200 despite future investment losses. If the latter, then put the traditional money in the G fund which can never lose value.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

sawhorse wrote:Yes, you can roll over future 401k accounts to the TSP account but only if the company allows it. You cannot roll over IRA funds. CORRECTION: You can roll over traditional IRA funds into the TSP. You cannot roll over Roth IRA funds. Nor would you want to because of the liquidity of your Roth IRA contributions.

Before you roll a future 401k into a TSP, research your state laws about protection against lawsuits. TSP, and IRA accounts for that matter, are not federally protected from lawsuits. Bankruptcy yes, but not lawsuits. But 401ks have ironclad protection against both bankruptcy and lawsuits. Some states also protect TSP and IRA accounts, some give partial protection, some none.

As it is, definitely open both Roth and traditional TSP accounts with a minimum of $200 in each, hopefully more, before you leave service. With your current income bracket, it makes sense to put most of your contributions to the Roth TSP and only enough toward the traditional to keep it open after you leave. I don't know if the $200 refers only to initial contributions or whether it has to stay above $200 despite future investment losses. If the latter, then put the traditional money in the G fund which can never lose value.
What is the advantage of roiling 401k into TSP vs rolling the TSP into my Roth IRA? I'm not questioning your advice I'm trying to understand how it all works. I already have a ROTH TSP account with a small balance so I will open the traditional starting with the next paycheck. Thanks again!
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Re: Military TSP and/or IRA?

Post by Twins Fan »

So you could take advantage of the good funds and great expense ratios of the TSP by keeping your $$ there instead of some other plan. Not much out there beats it... or, should I say nothing out there.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

Ok I figured that was the case. Current IRA is with Vanguard so taking advatage of the lowest fees with it although not as low as TSP.
sawhorse
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Re: Military TSP and/or IRA?

Post by sawhorse »

The advantage is that you'll have fund expenses about 7 to 8 times lower than the lowest Roth account. You'll also have access to the G fund.

If the program starts charging higher fees or removes the G fund, you can roll it over then.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

Makes sense. For allocation between the TSP and ROTH is it adventitious to keep the 3 fund princapal in both accounts or have 1 account hold most/all of the bonds?
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Re: Military TSP and/or IRA?

Post by grabiner »

Lowcountry79 wrote:Makes sense. For allocation between the TSP and ROTH is it adventitious to keep the 3 fund princapal in both accounts or have 1 account hold most/all of the bonds?
It's better to keep all your bonds in the G fund, because the G fund is a free lunch; it has the returns of an intermediate-term bond fund, but zero risk. Retail fund providers have funds which are almost as good as the rest of the TSP, but none can match the G fund.
Wiki David Grabiner
navyasw02
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Re: Military TSP and/or IRA?

Post by navyasw02 »

I concur, start a Roth TSP account. I wouldn't transfer it out either since the expense ratios are tiny. I started mine as soon as the Roth option came around and havent looked back.
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hoppy08520
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Re: Military TSP and/or IRA?

Post by hoppy08520 »

sawhorse wrote:The TSP is probably the best defined contribution plan in the country. Their expense ratios are 7-8 times smaller than Vanguard!
I don't want to detract from the pro-TSP message here, which I agree with entirely.

But Vanguard is not that much more expensive than the TSP. Once your funds get into the admiral status (which is $10,000 for most funds) then the fund expenses are typically "only" 2x - 3x that of the TSP.

Let's take a look at a simple 3-fund Vanguard portfolio using funds that are mostly equivalent to the C/S Funds, the I Fund and F Fund:

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) - 0.05%
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) - 0.09%
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) - 0.08%

If you have a 60/40 portfolio, with 1/3rd of stocks in the international fund, then the blended expense ratio with the admiral funds is 0.07%. That is 2.33 2.4 times more than the 0.03% 0.29% in the TSP.

Also, when looking at expense ratios that are this microscopic, ratios really aren't that significant. What if you had a portfolio that was 100 times cheaper than the 0.07% Vanguard portfolio above? That portfolio would still be only a little cheaper than the TSP because it's like using a micro razor to split an already fine hair.

Let's praise the TSP all day, but the Vanguard fees for an equivalent portfolio for anyone who achieves Admiral status after a few years of investing is only 0.04% 0.05% more.

EDIT: updated TSP expense ratio to 0.29% instead of 0.3%. Somewhere I read that the TSP fees were 0.03% and that stuck in my mind.
Last edited by hoppy08520 on Mon Mar 23, 2015 11:26 am, edited 1 time in total.
topgun100
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Re: Military TSP and/or IRA?

Post by topgun100 »

You might want to look into the Military Spouse Residency Relief Act (MSRRA) to see if you can change your wife's state of residence to FL to save on income taxes.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

hoppy08520 wrote:
sawhorse wrote:The TSP is probably the best defined contribution plan in the country. Their expense ratios are 7-8 times smaller than Vanguard!
I don't want to detract from the pro-TSP message here, which I agree with entirely.

But Vanguard is not that much more expensive than the TSP. Once your funds get into the admiral status (which is $10,000 for most funds) then the fund expenses are typically "only" 2x - 3x that of the TSP.

Let's take a look at a simple 3-fund Vanguard portfolio using funds that are mostly equivalent to the C/S Funds, the I Fund and F Fund:

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) - 0.05%
Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) - 0.09%
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) - 0.08%

If you have a 60/40 portfolio, with 1/3rd of stocks in the international fund, then the blended expense ratio with the admiral funds is 0.07%. That is 2.33 times more than the 0.03% in the TSP.

Also, when looking at expense ratios that are this microscopic, ratios really aren't that significant. What if you had a portfolio that was 100 times cheaper than the 0.07% Vanguard portfolio above? That portfolio would still be only a little cheaper than the TSP because it's like using a micro razor to split an already fine hair.

Let's praise the TSP all day, but the Vanguard fees for an equivalent portfolio for anyone who achieves Admiral status after a few years of investing is only 0.04% more.
I agree with your analysis of TSP not being extremely cheaper and is part of the reason I chose to stay away from it until now. (I am taking advatage of the lower ER with Vanguards ETFs.) I'm curious where you found the ER for TSP though as I found this from their website stating .029%. https://www.tsp.gov/investmentfunds/fun ... atio.shtml
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

topgun100 wrote:You might want to look into the Military Spouse Residency Relief Act (MSRRA) to see if you can change your wife's state of residence to FL to save on income taxes.
This is a great option for some but unfortunately does not apply for our situation since we actually live in different states.
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Re: Military TSP and/or IRA?

Post by sawhorse »

Good point about both having extremely low fees. But it's kind of comparing red delicious apples to granny smith apples since you use the fees for Admiral shares. I believe Admiral eligibility is per fund rather than total invested. It's a lot to have $10k per fund.

The best part is the G fund. As grabiner said, you can get a comparable portfolio for all the other TSP funds but not the G fund.

Since you can roll funds from the TSP to a Roth IRA but not the other way around, I don't see a reason to do it with the current options. If expenses change and/or the G fund is eliminated, you can do it then. There's no hurry.

I do think there's a situation in which it may be better to roll into a Roth IRA. If you cannot afford to make a Roth contribution that year, then using TSP money may be better because of the liquidity of Roth contributions. That should be a last resort for Roth contributions, not an excuse to not put aside money from each paycheck to
fund the Roth.
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Re: Military TSP and/or IRA?

Post by retiredjg »

Lowcountry79 wrote:I'm curious where you found the ER for TSP though as I found this from their website stating .029%.
The expense ratio of the TSP funds change from year to year. They are always low, but sometimes a little higher or a little lower. For some reason, you can always find what the expense ratio was for last year or other years in the past. But I'm yet to find one for the current year. I've wondered if they always charge what the actual costs were for the year before.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

sawhorse wrote:Good point about both having extremely low fees. But it's kind of comparing red delicious apples to granny smith apples since you use the fees for Admiral shares. I believe Admiral eligibility is per fund rather than total invested. It's a lot to have $10k per fund.

The best part is the G fund. As grabiner said, you can get a comparable portfolio for all the other TSP funds but not the G fund.

Since you can roll funds from the TSP to a Roth IRA but not the other way around, I don't see a reason to do it with the current options. If expenses change and/or the G fund is eliminated, you can do it then. There's no hurry.

I do think there's a situation in which it may be better to roll into a Roth IRA. If you cannot afford to make a Roth contribution that year, then using TSP money may be better because of the liquidity of Roth contributions. That should be a last resort for Roth contributions, not an excuse to not put aside money from each paycheck to fund the Roth.
Sawhorse thank your for your continued sound advice!! As far as funding Roth IRA that has already been done for 2015. I prefer to fully fund at the start of the year so the money has more time to work. Will this stratagy continue after I seperate from the military? I sure hope so but my crystal ball has been wrong before! :happy

I've given a lot of thought about your recommendation to keep ALL bonds in the G fund. I think it's a great idea but trying to put myself in the emotional state of mind for when the markets do go down and seeing my vanguard portfolio drop significantly without having the bonds there to counteract. Maybe I'm over thinking this? If I did go with G fund only would I replace the bond index with another stock index or just have a 2 fund vanguard portfolio?
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Re: Military TSP and/or IRA?

Post by Twins Fan »

Simply looking at it as having a 3 fund portfolio across all your accounts. Each account does not have to have all three funds. Think of it as one overall portfolio.

Also, Vanguard has a cool deal where you can add other accounts info on your page there. Then you can see your overall portfolio all in one place, so you don't have to think of it as each account going up and down or level.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

Thanks TwinsFan it's becoming more and more clear!! Great point about adding outside account info into vanguards website. I do have our USAA brokerage account info added in already, easy enough to do with TSP I suppose. (Maybe not since the funds don't have a ticker?).
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hoppy08520
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Re: Military TSP and/or IRA?

Post by hoppy08520 »

Even though Vanguard's admiral shares are very close to TSP in terms of expenses, I'd still at least get the TSP started for the following reasons:
  • The G Fund
  • It's nice to have an option to roll over future 401(k) accounts into the TSP especially for things like the Backdoor Roth IRA (if still around).
  • It's nice to have an option to roll over future 401(k) accounts into the TSP because your assets in an ERISA plan have better asset protection than even an IRA
In short, there's no downside to the TSP but plenty of upside. Even if you're on the fence, for goodness sake at least start your TSP and get $3,000 in there before you exit the military. If you ever change your mind later and find that you like the TSP for one reason or another, then at least you'll have your TSP. One might ask, "Well what's the point if I have only $3,000 in it, since I can no longer contribute to it?" Well, the point is that you might hold a number of jobs after you leave Federal/Military service and you might want to roll over some or all of various 401(k)s or IRAs into the TSP. As you may know, unlike many 401(k)s, the TSP allows separated employees to roll over other eligible accounts into the TSP.

There are so many people on this board who would love to have a TSP account so they don't need to keep all their old 401(k) accounts in the 401(k) of their current employer in order to keep the Backdoor Roth IRA open and to have the additional advantages of an ERISA plan.

I'm a case in point. I was in the TSP in the early 1990's. When I left I think I had around $30K in it, with my contributions being around $20K and matching was $10K (I do realize that there's currently no military matching). Anyway today that account is many times more than that because I've rolled in some 401(k) plans. I'm very glad I have the TSP because it gives me an option to do Backdoor Roth IRAs (even though I can't do that right now) and I feel a little better having some of my assets in an ERISA plan than in a rollover IRA, and I use the G Fund for around 70% of my fixed income allocation.
Lowcountry79 wrote:I agree with your analysis of TSP not being extremely cheaper and is part of the reason I chose to stay away from it until now. (I am taking advatage of the lower ER with Vanguards ETFs.) I'm curious where you found the ER for TSP though as I found this from their website stating .029%. https://www.tsp.gov/investmentfunds/fun ... atio.shtml
You're right, I updated my post. Somewhere I read that the TSP funds had changed to 0.03% but I must have remembered this wrong.
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Re: Military TSP and/or IRA?

Post by sawhorse »

TSP is not an ERISA plan, nor are IRAs. They therefore don't get federally mandated protection against lawsuits. Most states protect them, but you'll have to check your state laws. 401ks have the most ironclad protection against lawsuits.
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Re: Military TSP and/or IRA?

Post by Twins Fan »

Lowcountry79 wrote:Thanks TwinsFan it's becoming more and more clear!! Great point about adding outside account info into vanguards website. I do have our USAA brokerage account info added in already, easy enough to do with TSP I suppose. (Maybe not since the funds don't have a ticker?).
Ah, good point about no tickers. You could probably still add it somehow... just consider it like a cash/bank account and edit the balance every so often? If it will all be in the G fund, it shouldn't bounce around much anyway other than contributions.
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Re: Military TSP and/or IRA?

Post by retiredjg »

Lowcountry79 wrote:I've given a lot of thought about your recommendation to keep ALL bonds in the G fund. I think it's a great idea but trying to put myself in the emotional state of mind for when the markets do go down and seeing my vanguard portfolio drop significantly without having the bonds there to counteract. Maybe I'm over thinking this? If I did go with G fund only would I replace the bond index with another stock index or just have a 2 fund vanguard portfolio?
It sounds like holding a target type fund in the TSP and at Vanguard might be a good approach for you, at least for awhile. Pick your target fund by the stock to bond ratio, not the date in the name.

Or you could hold the G fund in the TSP and US stock and International at Vanguard. However, things will not split out like your accounts do, so you'll have to hold some bonds at Vanguard or some C/S at the TSP to make it work.
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Re: Military TSP and/or IRA?

Post by sawhorse »

Deleted until I can find out more for sure.
Last edited by sawhorse on Mon Mar 23, 2015 6:34 pm, edited 1 time in total.
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Re: Military TSP and/or IRA?

Post by hoppy08520 »

sawhorse wrote:TSP is not an ERISA plan, nor are IRAs. They therefore don't get federally mandated protection against lawsuits. Most states protect them, but you'll have to check your state laws. 401ks have the most ironclad protection against lawsuits.
Woah, I just googled that and you're right. My mistake. That being said, I would expect that the TSP has similar asset protection provisions as an ERISA plan, but I am not sure. I will try to research this.

This is what the TSP says about bankruptcy, but I don't know about other kinds of creditors:
TSP wrote:Bankruptcy
The funds in your TSP account are held in trust for you by the TSP and, by law, are protected from the claims of creditors. Your TSP account cannot be garnished to pay debts.
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Re: Military TSP and/or IRA?

Post by rj49 »

The most important reason is to have access to the G fund. I rolled over a VG IRA into it and took a SEPP after retiring at 42, so it's like an extra ultra-safe pension for me, designed to tide me over until age 60, when I can use other retirement accounts, and then I plan to use it as a sort of annuity that adjusts with higher interest rates.

While the yield is meager now in the G fund, you'll love it when interest rates rise and regular bonds lose value. There are charts on the TSP site that shows the G fund has kept up with inflation well, too. So I'd say your future self would be very grateful if you get into the TSP before you retire. The safety of it also makes it easier to stomach stock market volatility, so it has behavioral benefits for a retiree.
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Re: Military TSP and/or IRA?

Post by sawhorse »

Post deleted. I need to confirm something before writing anything here.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

Wow thanks for everyone's input and advice! We have a great discussion going and diving a bit deeper into it than I anticipated. Not complaining, I always like to analyze and learn new information!!

Just to be clear on my current "portfolios" I do have: ROTH IRA using 3 fund stratagy,(fully funded for 2015), USAA brokerage with a few stocks, ROTH TSP with a very small balance.(opened it 2 weeks ago).

So after all the advice and hours of reading and research this is the plan so far: contribute more funds to Roth TSP (G fund initially to take the place of Vanguard bond ETF). Open Traditional TSP (using minimum amount of funds for now). Once I reach G fund goal in Roth TSP sell vanguard bond ETF and reallocate. (most likely into my total stock market). Finally divert Roth TSP G contributions into the C, and I funds respectivly.

Sound right?

Now on to research SEPP, ERISA, and G fund history charts..... :D
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

hoppy08520 wrote:
I'm a case in point. I was in the TSP in the early 1990's. When I left I think I had around $30K in it, with my contributions being around $20K and matching was $10K (I do realize that there's currently no military matching). Anyway today that account is many times more than that because I've rolled in some 401(k) plans. I'm very glad I have the TSP because it gives me an option to do Backdoor Roth IRAs (even though I can't do that right now) and I feel a little better having some of my assets in an ERISA plan than in a rollover IRA, and I use the G Fund for around 70% of my fixed income allocation.
Thank you for sharing your experience, it is very helpful! Until this thread, I had no idea about rolling 401k into the TSP.
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Lowcountry79
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Re: Military TSP and/or IRA?

Post by Lowcountry79 »

rj49 wrote:The most important reason is to have access to the G fund. I rolled over a VG IRA into it and took a SEPP after retiring at 42, so it's like an extra ultra-safe pension for me, designed to tide me over until age 60, when I can use other retirement accounts, and then I plan to use it as a sort of annuity that adjusts with higher interest rates.

While the yield is meager now in the G fund, you'll love it when interest rates rise and regular bonds lose value. There are charts on the TSP site that shows the G fund has kept up with inflation well, too. So I'd say your future self would be very grateful if you get into the TSP before you retire. The safety of it also makes it easier to stomach stock market volatility, so it has behavioral benefits for a retiree.

Congrats on being able to retire at 42! That must feel great!!
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Re: Military TSP and/or IRA?

Post by retiredjg »

Lowcountry79 wrote:Sound right?
It kind of sounds OK, but we can't really tell because we don't know how big the accounts are, how much you plan to save, etc.
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