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How to Grow Your Thrift Savings Plan

If you are a military member or federal civilian, you may be wondering how you can grow your Thrift Savings Plan retirement system. This is a lucrative retirement plan that involves simple index funds so that it is easy to understand and access for federal and military employees. However, knowing how to grow a thrift savings plan is confusing. 

A Thrift Savings Plan may look straightforward because it consists of five index funds that can easily help diversity and grow your Thrift Savings Plan. However, read on to figure out the best way to handle your retirement plan, allocate your contributions, and maximize its growth so that you are comfortable in your retirement in the future. 

Grow Your Thrift Savings Plan Through Diversification

The first thing you want to review is how your monies in the Thrift Savings Plan are allocated. Stocks usually grow anywhere from 8 to 10 percent a year, while bonds and treasuries are a bit less aggressive with a growth rate of 2 to 4 percent a year. To grow your Thrift Savings Plan, you should allocate your monies between five principal funds: 

  • G Fund – Comprised of unique treasuries
  • F Fund – Follows the Bloomsberg Barclays U.S. Aggregate Bond Index
  • C Fund – Follows the S&P 500 index
  • S Fund – Follows the Dow Jones U.S. Completion Total Stock Market Index
  • I Fund – Follows the MSCI EAFE Index 

A Thrift Savings Plan is composed of these five funds, which are all index funds because, as noted above, they each follow a specific market index. This helps diversify your portfolio, which is the best way to grow your Thrift Savings Plan. All of the plans except the G Fund are managed by the biggest asset manager on Earth, Blackrock, Inc. 

By investing the maximum amount of money allowed by the IRS and diversifying these contributions throughout the five funds (or choosing the much simpler L Fund), you can successfully grow your Thrift Savings Plan for your retirement. That way, you can retire comfortably after serving your country in the military or in government.

You can manage your Thrift Savings Plan by setting how much you want to contribute from your paycheck and by deciding whether to move your money out of one fund into another fund depending on the market. Although it is easy to say what percentage should be allocated each month, knowing where to move money is more difficult. 

If knowing where to allocate your money is confusing, you can also choose a Lifestyle fund, also called a L Fund. This fund creates a diversified portfolio for you by combining all of the other funds and automatically moves the allocation of your investments for you. That way, you can grow your plan without worrying about where to allocate funds. 

Boost Your Own Contributions to Grow your Account

Not only does diversification help grow your Thrift Savings Plan. You should increase what you contribute from your paycheck each month, if possible, to help grow your savings towards retirement. For example, if you are deployed and your paycheck increases due to combat pay or tax breaks, you can up your percentage of allocation. 

You can contribute each year up to the maximum amount set by the IRS, also called the IRS elective deferral limit. After you turn fifty years of age, you can make additional contributions to your Thrift Savings Plan and reap even more benefits, known as catch-up contributions. This is a great way to grow your plan and save for retirement. 

You may not have the investment knowledge to know where and when to move your money and allocate your funds. If that is the case, the best thing to do is simply not touch your Thrift Savings Plan and let it grow through diversification. However, you do have control with how much you allocate to the fund each year. For example: 

  • You contribute 10 percent of your $100,000 salary each year, equaling a $10,000 yearly contribution
  • You receive a 5 percent matching contribution from your employer, giving you another $5,000 contribution each year
  • Your Thrift Savings Plan is diversified enough that you receive a 6 percent growth per year
  • Your Thrift Savings Plan will grow through diversification and the $15,000 yearly contribution to an amount of more than $3 million in retirement savings 

As you can see from the example, just by contributing $10,000 from your paycheck, plus your employer’s matching contributions, and a diversification that allows for 6 percent growth, you have substantially grown your Thrift Savings Plan to become a millionaire in retirement. This is a hypothetical example that illustrates growth over time. 

Taking Advantage of Full Contribution Limits

A Thrift Savings Plan is essentially the government’s form of a standard 401(k), but with more lucrative benefits for those who qualify. Therefore, there are contribution limits set by the IRS each year just like a typical retirement plan. The best way to grow your Thrift Savings Plan is to try to reach those maximum contribution limits as close as possible: 

For 2021:

  • Elective deferral limit: $19,500
  • Catch-up contribution limit: $6,500
  • Annual additions limit: $58,000 

The elective deferral limit and catch-up contribution limit did not change from 2020 to 2021. However, the annual additions limit did rise by $1,000, from $57,000 to $58,000. The elective deferral limit is how much you can contribute each year from your paycheck tax-deferred and Roth contributions made by you each year. 

As discussed, the catch-up contributions are additional monies you can contribute after the age of fifty. Then, the annual additions limit is the maximum amount that can be made on behalf of the individual in one calendar year. This means contributions made by both you and your employer cannot exceed that maximum amount of $58,000. 

If possible, the most lucrative way to grow your Thrift Savings Plan is to contribute the maximum $19,500 in 2021. You cannot control the amount matched (up to 5 percent), but you do control how much you put into your plan. That way, you have the maximum amount of money allocated to your five funds that will grow fully each year. 

Plan Out Your Retirement

When you are ready to withdraw your money from your Thrift Savings Plan in retirement, you have the choice of either taking the money out in one lump, receiving monthly payments, or purchasing an annuity (or a combination of those choices). However, remember that this plan is deferred, so withdrawals are subject to tax. You can also choose to use your TSP to invest in real estate.

A Thrift Savings Plan works similar to a Traditional IRA in that you are contributing your monies tax-deferred. This means you are getting the tax benefits right away when you file your taxes because you are not paying taxes on the monies from your paycheck that are contributed each year. However, you will pay taxes when you withdraw the money. 

There are also Roth Thrift Savings Plan options that work like a Roth IRA – your investments grow tax free and, although you do not get tax benefits up front, you will not pay any taxes when you withdraw the funds. However, if your agency matches your contributions, they will contribute to the Traditional Thrift Savings Plan. 

Remember that you can also roll over money from another 401(k) or a Traditional IRA into your Thrift Savings Plan before you retire. That means you will have even more savings when you retire since a Thrift Savings Plan charges lower average net expenses than private company 401(k) plans and has lucrative tax benefits.

 

 

Kelly Madden

Kelly Madden

Kelly is a 14-year Air Force spouse, real estate agent, real estate investor, and virtual assistant. After starting out as an intern with ADPI in 2019 and later acting as ADPI’s blog coordinator in Jan 2020, Kelly is thrilled and honored to take on the role of ADPI’s new Community Manager as of November 2020. She looks forward to building our community and supporting our members throughout their real estate investing journey.
Kelly Madden

Kelly Madden

Kelly is a 14-year Air Force spouse, real estate agent, real estate investor, and virtual assistant. After starting out as an intern with ADPI in 2019 and later acting as ADPI’s blog coordinator in Jan 2020, Kelly is thrilled and honored to take on the role of ADPI’s new Community Manager as of November 2020. She looks forward to building our community and supporting our members throughout their real estate investing journey.
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Our team strives to educate, mentor and empower active duty service members, veterans, spouses and military families to reach financial freedom through creating passive income through real estate investing. Our goal is for Active Duty Passive Income (ADPI) members to own as much of America as possible.