Do homework before picking savings plan
YOKOSUKA NAVAL BASE — Thrift Savings Plans and Individual Retirement Accounts are tax-sheltered retirement investments. So what is the difference, and why should anyone care?
Because for enlisted servicemembers, TSP may be sheltered at the wrong end.
Painting in broad strokes, TSP is widely considered the easiest option for servicemembers. They can sign up for it during basic training and the money is automatically deducted.
“The investment is ‘fire and forget,’” said Yokosuka’s Fleet and Family Service Center financial educator Collin Schriver. “Your tax-deferred contributions add up to more money working for you, earning interest on your investment.”
Compared to itself, TSP looks, smells and tastes like a great deal. And it is, especially if TSP is the only way to get junior servicemembers to begin saving for their future. More information about TSP is available at www.tsp.gov or by speaking to a command financial specialist.
However, a smart investor will check out available options, such as a Roth IRA, which can be invested into until the age of 59½. With a TSP, once a servicemember gets out of the service or retires, her or she is no long eligible to invest into it.
According to literature provided by Family Financial Advocates, an IRA comes in two basic flavors: the traditional IRA, which is tax-deferred like a TSP, and the Roth IRA where you pay your taxes up front.
Paying taxes now is not always bad, especially if you’re not making a lot of money.
If you are taxed up front when you’re in a low tax bracket, you will pay less than you would later in your career when, ostensibly, you should be making more money. A thought is that if you are going to pay taxes on a given amount of money, why not pay less?
With a Roth IRA, once you’ve been taxed — and if you follow the withdrawal rules — the investment, plus its compounded interest growth, is yours tax-free.
“I would personally choose the Roth, simply because the contributions at retirement will be tax-exempt,” wrote Michael L. Chindamo, CFP, AIF managing director, financial planning and co-founder of Family Financial Advocates and Family Value Creations Inc. in an e-mail to Stars and Stripes. “That is a huge benefit that is so difficult to beat.”
According to Chindamo, a Roth also allows the investor the opportunity to make better choices than what might be offered in the TSP.
But you must do your homework, he stressed.
“Large fund platforms such as a TSP have to have a platform of very large funds in order to take such large amounts of contributions,” Chindamo wrote. “This, unfortunately, lends itself … to lesser quality funds.”
If you think you will be earning more today than you will be making when you retire, perhaps TSP is your ticket to ride. If you expect to be earning less today than when you retire, you may consider investing in a Roth IRA.
But as any financial expert will tell you, the most important thing is to invest.
“The concept of a tax-deduction incentive to participate in a qualified plan as far as my firm is concerned should be of little consequence,” Chindamo wrote. “So, we like both (TSP & Roth). However, the real issue is to DO SOMETHING ON A CONSISTENT BASIS.”
According to the financial newsweekly Barron’s, individual retirement accounts created by the Taxpayer Relief Act of 1997 that permit account holders to allow their capital to accumulate tax- free under certain conditions are named after the Delaware senator who championed the idea of expanded IRAs, William V. Roth Jr.
Assets inside Roth IRAs can be invested in stocks, bonds, mutual funds, bank instruments such as CDs, and money market accounts, precious metals and real estate.