Changes to your TSP

The TSP Web Page just announced several changes and proposed changes to the program. Three of them were interesting to me.

The first was the approval of the ROTH TSP option. Beginning in 2011, TSP will have a ROTH option that will allow military members to contribute post-tax money into their retirement account. Instead of growing tax deferred, proceeds to the ROTH TSP will be tax free when withdrawn.

Many of you have seen my posts recommending that military members fully fund their ROTH IRAs before contributing to the TSP because of the tax treatments. This option might not change that guidance, since TSP investment options are not that interesting, but it will allow you to contribute a lot more money to these tax-favored accounts.

Speaking of investment options, the second interesting bit of news is that the administrators of the TSP have been granted permission to open a “Mutual Fund Window” to give participants access to a wide variety of funds. There are concerns about the complexity and costs associated with this option, however, so we’ll have to see how this goes. I suggest that military members and organizations like the Military Officers Association of America, the American Legion, the VFW, and other military support groups send letters and e-mails supporting the Mutual Fund Window to the TSP.

Finally, there was news on “Automatic Enrollments” into the TSP. Here’s the quote on the topic from the TSP News:

"Automatic Enrollment
The original impetus of the new law was the automatic enrollment provision that was studied and subsequently recommended for legistlative action by the members of the Federal Retirement Thrift Investment Board. The new law authorizes automatic enrollment for new Federal vicilian employees. In deference to concerns within the Department of Defense, the final legislation was amended by the Congress to exclude members of the uniformed services from the automatic enrollment provision..."

I personally believe that automatic enrollment would be an excellent move for the uniformed services to implement. I’ve read that people are usually not inclined to turn down enrollment if it’s automatic, but often do not enroll if they must actively “enroll.” For 18-24 year olds, a 1 – 3% allotment to the TSP account tied to the government insured “G-Fund” would be painless, and provides them with a foundation for future savings. Now many veterans leave the service after one or two tours of duty with no retirement savings at all.

I believe that the DoD should allow automatic enrollment, but that it should also include a bonus for first and second term enlistees/officers equal to amount of the automatic enrollment amount. For example, if the automatic enrollment is for 3%, then the government should match all of that.

This powerful program would dramatically improve the number of military members participating in TSP and provide all of them a real opportunity to save for retirement outside of waiting 20-years to be vested in the program.