New Military recruit needs help with TSP

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GeoMetry
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New Military recruit needs help with TSP

Post by GeoMetry » Tue Jul 09, 2019 5:32 pm

My daughter is in the new US Military BRS (Blended Retirement System)
I have convinced her to maximize her TSP contributions.
She went to the MyPay web site and the input form said the maximum she is allowed to contribute to Roth is 60% of her base pay. There was a slightly higher limit for Traditional contributions but it went to zero after she enter 60% on the Roth line.
60% will not get her up to the $19K limit.
This is her first year, she started in May.
Everything I read online said she could contribute up to 100%.
She would like to contribute 80%.
Why is she limited to 60%?

What is an appropriate TSP fund allocation for a 23 year old?

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grabiner
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Re: New Military recruit needs help with TSP

Post by grabiner » Tue Jul 09, 2019 8:46 pm

The simplest investment option in the TSP is the L 2050 fund, switching to the 2060 fund when it is created next year. (The fund allocation is based on the year you plan to withdraw the money, not the year you plan to leave the military if you continue to work in a civilian career.)
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Morgan Dollar 1921
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Re: New Military recruit needs help with TSP

Post by Morgan Dollar 1921 » Tue Jul 09, 2019 9:06 pm

There will be many opinions and she could do worse than the L method 2050 or 2060.

I would suggest 40% C, 20% S, 20% I, 10% F and 10% G. I prefer to be a little light on international exposure. My DW wanted to build a base, a foundation she called it with G, and she wanted to SWAN, sleep well at night.

Not up to speed on the US Military BRS (Blended Retirement System), but current fed employees can channel most or all to the Roth, but their match must go to the Traditional TSP.

Congrats to her and thank you to her also!

warner25
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Re: New Military recruit needs help with TSP

Post by warner25 » Tue Jul 09, 2019 9:30 pm

GeoMetry wrote:
Tue Jul 09, 2019 5:32 pm
Why is she limited to 60%?
We had a discussion about the limits in MyPay last year and Nords shared this insight...
Nords wrote:
Sat Dec 08, 2018 12:51 pm
...DFAS uses the remaining amount for withholding estimated taxes and for FICA. Even if he’s chosen to withhold zero taxes from his pay, DFAS has still coded the Roth TSP max percentage to ~60%. The traditional TSP contribution limit in MyPay is 92%, again because of the 7.45% FICA.
If your daughter contributes up to the limits of the TSP and still has more savings to invest, she can of course put money into an IRA too, or even a taxable investment account. Tax gain harvesting should be profitable for her, given all the tax advantages of active duty service, so a taxable account can actually be quite efficient.

mhalley
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Re: New Military recruit needs help with TSP

Post by mhalley » Wed Jul 10, 2019 12:32 am

Merriman has some recs here
https://paulmerriman.com/tsp/
But nothing wrong with the L.

SteveJones
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Re: New Military recruit needs help with TSP

Post by SteveJones » Wed Jul 10, 2019 5:02 am

How is she going to live? Based on how much she has to invest she is junior enlisted. Won't this large of an allocation affect her quality of life?

FrankLUSMC
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Re: New Military recruit needs help with TSP

Post by FrankLUSMC » Wed Jul 10, 2019 7:22 am

SteveJones wrote:
Wed Jul 10, 2019 5:02 am
How is she going to live? Based on how much she has to invest she is junior enlisted. Won't this large of an allocation affect her quality of life?
I have that answer! Lives in base supplied housing (barracks) and eats government supplied food (chow hall) I saved well over 50% of my pay in the late '70's.. use the other <50% having fun.

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GeoMetry
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Re: New Military recruit needs help with TSP

Post by GeoMetry » Wed Jul 10, 2019 1:29 pm

She can't put any of her housing allowance or food allowance into TSP. Housing and food allowances are not taxed. She is sharing an apartment so she will have some left over money from the housing allowance. Fresh out of college she will still have more money to spend than she has ever had before. So better to get used to saving it than spending it. Next year she only needs to save 40% to hit the $19K limit so it will be like getting a big raise.

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Re: New Military recruit needs help with TSP

Post by White Coat Investor » Wed Jul 10, 2019 1:35 pm

GeoMetry wrote:
Tue Jul 09, 2019 5:32 pm
My daughter is in the new US Military BRS (Blended Retirement System)
I have convinced her to maximize her TSP contributions.
She went to the MyPay web site and the input form said the maximum she is allowed to contribute to Roth is 60% of her base pay. There was a slightly higher limit for Traditional contributions but it went to zero after she enter 60% on the Roth line.
60% will not get her up to the $19K limit.
This is her first year, she started in May.
Everything I read online said she could contribute up to 100%.
She would like to contribute 80%.
Why is she limited to 60%?

What is an appropriate TSP fund allocation for a 23 year old?
Just leave it at 60% and go into finance late in the year and write a check for the rest. Assuming she makes $19K, she can contribute $19K. If unsure how to invest it, just use the most aggressive L fund. I agree with the choice of Roth.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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GeoMetry
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Re: New Military recruit needs help with TSP

Post by GeoMetry » Wed Jul 10, 2019 1:43 pm

White Coat Investor wrote:
Wed Jul 10, 2019 1:35 pm
Just leave it at 60% and go into finance late in the year and write a check for the rest.
Is that something you can do? Is there a form for that?

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White Coat Investor
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Re: New Military recruit needs help with TSP

Post by White Coat Investor » Wed Jul 10, 2019 2:28 pm

GeoMetry wrote:
Wed Jul 10, 2019 1:43 pm
White Coat Investor wrote:
Wed Jul 10, 2019 1:35 pm
Just leave it at 60% and go into finance late in the year and write a check for the rest.
Is that something you can do? Is there a form for that?
No, but if you go in to Finance every day for a month and ask they'll probably let you do it eventually. Ask me how I know.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

warner25
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Re: New Military recruit needs help with TSP

Post by warner25 » Wed Jul 10, 2019 4:45 pm

GeoMetry wrote:
Wed Jul 10, 2019 1:29 pm
...Fresh out of college she will still have more money to spend than she has ever had before. So better to get used to saving it than spending it. Next year she only needs to save 40% to hit the $19K limit so it will be like getting a big raise.
Yeah, an O-1 will make about $50k with allowances, after taxes, typically in a LCOL area with no out of pocket healthcare expenses, and it goes up rapidly from there. For a service academy or ROTC scholarship grad with no student loan debt, amazing things are possible. I didn't keep good records during my first year on active duty, but I probably saved more than $20k. As an O-3, newly married but before kids, my wife and I saved as much as $80k one year. Those early years have put us in a very good place now at mid-career. $1M+ in savings with retirement pay at age 41 is within striking distance. I wish I could convey the financial opportunities to every young officer.

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oncorhynchus
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Re: New Military recruit needs help with TSP

Post by oncorhynchus » Wed Jul 10, 2019 5:45 pm

Not knowing her duty status, branch of service, or what her initial training courses/obligations will be, it may be better NOT to try and max out her savings rate until she is settled at her first permanent duty station. Many new officers have to attend back-to-back training at temporary duty stations, and with the way moving and travel reimbursement works, it is good to have plenty of liquid assets built up, eventually in a 6-12 month emergency fund. Additionally, the new duty station may have a significantly different cost of living than when one was living at home or in college. Trying to make 12 months worth of TSP contributions in 7 months may cause a liquidity issue.

Assuming next calendar year she is settled at her new permanent duty station, has a handle on what her monthly budget will be in that cost of living area with decent housing and reliable transportation, and has a reasonable emergency fund started, then maxing her savings rate beyond funding a Roth IRA and modest TSP contributions (enough to meet 1% match) would be worth pursuing.

Regards,

o
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snowman
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Re: New Military recruit needs help with TSP

Post by snowman » Thu Jul 11, 2019 10:01 am

My son will go through that process in 3-4 weeks, and I expect him to see 60% contribution limit to Roth TSP per Nords post last December in the thread warner25 already referenced above. I am not sure what the maximum is if contributions are split between traditional and Roth, we will find out. My point is that I did not even consider contributions into traditional TSP until I played with his projected 2019 tax return and came across retirement savers credit. It’s worth up to $1K (single filer) as long as AGI is below $19,250. The credit is non-refundable so if his FIT is less than $1K the credit will equal his total tax bill. Not sure if/what additional income your D has, but wanted to bring it to your attention.

Another, non-related issue is matching contributions (up to 5%) for ROTC graduates (apparently non-issue for Academy graduates). My son got email last week from his unit that their first batch of graduates that reported in May had starting date coded incorrectly (commissioning date vs. contract signing date), and therefore not eligible to receive full (up to 5%) matching contributions. There were instructions attached about how to get it fixed. Hopefully your D is unaffected but something to look at just to be sure.

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Re: New Military recruit needs help with TSP

Post by Valuethinker » Thu Jul 11, 2019 11:34 am

GeoMetry wrote:
Tue Jul 09, 2019 5:32 pm
My daughter is in the new US Military BRS (Blended Retirement System)
I have convinced her to maximize her TSP contributions.
She went to the MyPay web site and the input form said the maximum she is allowed to contribute to Roth is 60% of her base pay. There was a slightly higher limit for Traditional contributions but it went to zero after she enter 60% on the Roth line.
60% will not get her up to the $19K limit.
This is her first year, she started in May.
Everything I read online said she could contribute up to 100%.
She would like to contribute 80%.
Why is she limited to 60%?

What is an appropriate TSP fund allocation for a 23 year old?
Quite honestly the 2050 fund. Or 2060.

I am not an American. But I was once 23. What you want is a single decision that you make and forget about. At that age and in such a 110% "career" (calling is a better word) you don't want to have to worry re investment strategy, right funds etc. That is for old types on the internets who have too much time on their hands ;-)

krafty81
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Re: New Military recruit needs help with TSP

Post by krafty81 » Thu Jul 11, 2019 12:41 pm

Great to get her thinking about TSP! Remember contribution limits go way up when deployed to a combat zone, and there is a 10K, 10% USG savings plan that is offered during deployment as well. She will also be able to deduct her tIRA if she chooses that over Roth. Retired USN.

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Re: New Military recruit needs help with TSP

Post by grabiner » Thu Jul 11, 2019 1:50 pm

krafty81 wrote:
Thu Jul 11, 2019 12:41 pm
Great to get her thinking about TSP! Remember contribution limits go way up when deployed to a combat zone, and there is a 10K, 10% USG savings plan that is offered during deployment as well. She will also be able to deduct her tIRA if she chooses that over Roth. Retired USN.
However, Roth is better than traditional for most military, because military tend to be in low tax brackets now (while much of their pay is not taxable) and may retire in higher tax brackets (with military pensions if appropriate, and 401(k) plans from post-military careers). Only military at high ranks, or with high-earning spouses, are likely to be beyond the 12% tax bracket.

That said, the extra contributions from tax-exempt combat pay can be contributed only to a traditional TSP; withdrawal of the tax-exempt contributions is tax-free, but gains are taxed. Only do this after maxing out your Roth TSP and Roth IRA.
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jsprag
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Re: New Military recruit needs help with TSP

Post by jsprag » Sat Jul 13, 2019 2:28 pm

She can try to submit her request for more than 60% to her finance office using form TSP-U-1 available from the TSP website. As for the fund, I recommend L2050 to get her started.

While I'm an advocate of early and aggressive saving, I hope she isn't neglecting the importance of building up an emergency fund.

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Re: New Military recruit needs help with TSP

Post by Nords » Sun Jul 14, 2019 12:45 pm

warner25 wrote:
Tue Jul 09, 2019 9:30 pm
GeoMetry wrote:
Tue Jul 09, 2019 5:32 pm
Why is she limited to 60%?
We had a discussion about the limits in MyPay last year and Nords shared this insight...
Nords wrote:
Sat Dec 08, 2018 12:51 pm
...DFAS uses the remaining amount for withholding estimated taxes and for FICA. Even if he’s chosen to withhold zero taxes from his pay, DFAS has still coded the Roth TSP max percentage to ~60%. The traditional TSP contribution limit in MyPay is 92%, again because of the 7.45% FICA.
If your daughter contributes up to the limits of the TSP and still has more savings to invest, she can of course put money into an IRA too, or even a taxable investment account. Tax gain harvesting should be profitable for her, given all the tax advantages of active duty service, so a taxable account can actually be quite efficient.
Thanks for the tag, Warner!
GeoMetry wrote:
Tue Jul 09, 2019 5:32 pm
She went to the MyPay web site and the input form said the maximum she is allowed to contribute to Roth is 60% of her base pay. There was a slightly higher limit for Traditional contributions but it went to zero after she enter 60% on the Roth line.
60% will not get her up to the $19K limit.
This is her first year, she started in May.
Everything I read online said she could contribute up to 100%.
She would like to contribute 80%.
Why is she limited to 60%?
jsprag wrote:
Sat Jul 13, 2019 2:28 pm
She can try to submit her request for more than 60% to her finance office using form TSP-U-1 available from the TSP website. As for the fund, I recommend L2050 to get her started.

While I'm an advocate of early and aggressive saving, I hope she isn't neglecting the importance of building up an emergency fund.
@GeoMetry, I'd try the TSP-U-1 option along with ramping up her contributions to her Roth IRA and taxable accounts.

She can also start piling up cash in 2019 (in a high-yield savings account) to use for Roth TSP contributions in 2020-2025. She'd keep her Roth TSP contribution level set as high as she can and then live off the cash while a higher percentage of her pay goes to the Roth TSP.

The military makes it really hard to maximize TSP contributions during the first year of service. When our daughter got a bonus for joining the service, she wasn't able to deposit it in her TSP account (because she didn't have one yet). Instead (once she had a TSP account) she set her Roth TSP contributions at 60% and filed a TSP-U-1 for a higher contribution. Then she lived off the bonus money (in her savings account) while diverting an equivalent amount of her pay into her Roth TSP.
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Shorty
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Re: New Military recruit needs help with TSP

Post by Shorty » Mon Feb 17, 2020 5:55 pm

I know I'm reviving an old thread, but it's worth noting that the new Blended Retirement System(BRS) starts matching at 1%, but does not match the 5% until 2 years of service (YOS).

https://militarypay.defense.gov/Portals ... 140805-343

ROTH TSP is great for new/low income, but $19k may be unrealistic for most brand new officer/enlisted servicemembers.

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Re: New Military recruit needs help with TSP

Post by ncbill » Wed Feb 19, 2020 1:17 pm

Shorty wrote:
Mon Feb 17, 2020 5:55 pm
I know I'm reviving an old thread, but it's worth noting that the new Blended Retirement System(BRS) starts matching at 1%, but does not match the 5% until 2 years of service (YOS).

https://militarypay.defense.gov/Portals ... 140805-343

ROTH TSP is great for new/low income, but $19k may be unrealistic for most brand new officer/enlisted servicemembers.
Yep, my newly-minted O-1 defers 30% of their pay to the Roth TSP, but that's nowhere near the annual limit.

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Re: New Military recruit needs help with TSP

Post by snowman » Wed Feb 19, 2020 3:56 pm

ncbill wrote:
Wed Feb 19, 2020 1:17 pm
Shorty wrote:
Mon Feb 17, 2020 5:55 pm
I know I'm reviving an old thread, but it's worth noting that the new Blended Retirement System(BRS) starts matching at 1%, but does not match the 5% until 2 years of service (YOS).

https://militarypay.defense.gov/Portals ... 140805-343

ROTH TSP is great for new/low income, but $19k may be unrealistic for most brand new officer/enlisted servicemembers.
Yep, my newly-minted O-1 defers 30% of their pay to the Roth TSP, but that's nowhere near the annual limit.
For new officers, I think it is realistic, but very dependent on each individual and their priorities. My son (O-1) defers 49% to max 2020 limit of $19.5K, plus funds $6K annual Roth. His friends (all O-1s) defer about 15-20%, but they also spend a lot more money - cars loans, guns, eating out, entertainment, etc. Some are aggressively saving for a house down-payment in lieu of TSP contributions.

When I look at his O-1 compensation, it's hard for me to imagine NOT maxing out: $39.5K salary leaves $13K to spend after TSP contribution and paying all income taxes. BAS covers his monthly food budget, and he shares apartment with another O-1, so rent plus utilities is only half of his housing allowance; the other half funds $6K Roth contribution. After covering all his bills/expenses, paying all taxes, and maxing out investments, he still has $1K left every month to spend on anything he wants.

Shorty
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Re: New Military recruit needs help with TSP

Post by Shorty » Thu Feb 20, 2020 12:08 am

snowman wrote:
Wed Feb 19, 2020 3:56 pm
When I look at his O-1 compensation, it's hard for me to imagine NOT maxing out: $39.5K salary leaves $13K to spend after TSP contribution and paying all income taxes. BAS covers his monthly food budget, and he shares apartment with another O-1, so rent plus utilities is only half of his housing allowance; the other half funds $6K Roth contribution. After covering all his bills/expenses, paying all taxes, and maxing out investments, he still has $1K left every month to spend on anything he wants.
Sure, at your first school/training command...I started that way too. Then you PCS to different areas on different timeframes as your peers and life happens. IMO, more significant money opportunities will become available with travel/deployments and a little rank. Not a bad gig if he continues to enjoy the lifestyle. I’m sure you are very proud :-)!

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Re: New Military recruit needs help with TSP

Post by snowman » Thu Feb 20, 2020 11:43 am

Shorty wrote:
Thu Feb 20, 2020 12:08 am
snowman wrote:
Wed Feb 19, 2020 3:56 pm
When I look at his O-1 compensation, it's hard for me to imagine NOT maxing out: $39.5K salary leaves $13K to spend after TSP contribution and paying all income taxes. BAS covers his monthly food budget, and he shares apartment with another O-1, so rent plus utilities is only half of his housing allowance; the other half funds $6K Roth contribution. After covering all his bills/expenses, paying all taxes, and maxing out investments, he still has $1K left every month to spend on anything he wants.
Sure, at your first school/training command...I started that way too. Then you PCS to different areas on different timeframes as your peers and life happens. IMO, more significant money opportunities will become available with travel/deployments and a little rank. Not a bad gig if he continues to enjoy the lifestyle. I’m sure you are very proud :-)!
It's not about pride, I honestly just want my kids to be happy, and take advantage of the opportunities this country offers them. I certainly didn't have them growing up where I did...

But my point still stands - it's all about choices these new O-1s make, and I can only take partial credit. Most of it goes to his ROTC commander, who kept telling them, over and over, to not blow up their first officer salary on new truck payments and on eating out. He even presented sample budget, showing 50% TSP contribution (half their starting salary), and BAS covering food budget for the month (learn to cook and eat at home, he told them).

For housing expenses, he recommended to NOT look for apartment and sign the lease before reporting. Instead, he said, shop for a place to live after you report, and sign the lease with another O-1, preferably 2. That way, BAH not only covers your rent and utilities, but you keep extra money in your pocket every month. Share a house with 3-4 other guys, and you save most of your housing allowance. Use that to fund your Roth IRA, or to subsidize your food or travel budget, or take your parents on nice vacation. Live like that your first couple of years, and you will build solid financial foundation in your life. Your income will grow rapidly from there, and your lifestyle will increase with it without jeopardizing your savings.

So that was his plan BEFORE he even left home. I thought it was little risky, especially the housing part, but he reassured us it's going to work out. There will be other guys like him looking for roommate, the job is guaranteed, all unexpected health expenses are covered by military. He bought used car for $8K with his savings from scholarships, and off he went.

Now here is the part about choices. Most of his O-1 friends live alone. About half of them have new car/truck payment (exactly what ROTC commander said not to do). Everybody is exceeding their food allowance greatly by eating out often (some do it daily). Son says that’s the biggest budget buster right there, and I agree - eating out is expensive! He is thankful to his former commander for advise given. He doesn’t know anyone contributing more than 30% (seems like they freely share their numbers, must be a military thing). However, there are a few guys who are just as aggressive savers as my son, but they are saving for a house down-payment instead, with the plan to rent it out to get another income stream going. These guys plan to start maxing out TSP in year 3 or 4.

They also had financial presentation few months back, showing them how they could max out TSP contribution, and live off of the other half (with all living expenses being covered by BAH and BAS). The room gasped that it’s impossible...

So again, opportunity is there for everyone, but not everyone will take advantage of it. I actually like the fact that the commanding officers seem to nudge new O-1s into 50% TSP contribution rate their first couple of years in the military service. I did not expect that. But, as the saying goes, you can bring horse to water, but you cannot force him to drink.

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