Once you've decided to start savings for retirement, there are a multitude of options available. Active duty military members have two choices that may have tax benefits: the Thrift Savings Plan (TSP) or an Individual Retirement Account (IRA). There are two primary types of IRAs, Roth and Traditional. Here are the main points about each type of account:
TSP
- contribute through payroll deduction
- contributions are pre-tax and will lower your current tax bill
- annual contributions capped at $15,500 for 2008 (unless you are over age 50)
- taxes are paid at the time of distribution
- tax-exempt income (such as combat zone pay) remains tax-exempt at withdrawal, though the earnings on tax-exempt income are taxed at withdrawal
- penalties apply for early withdrawal
- there is a loan program for borrowing against TSP balances
- limited investment options
- no choice of investment company
- very low fees
- contributions must be made by December 31st
- required minimum distributions once you reach 70 1/2 years old
- only for military members
- can begin contributions with 1% of base pay
Traditional IRA
- generally tax-deductible, depending on your income and filing status
- taxed at withdrawal
- penalties for early withdrawal
- set up through your choice of companies
- unlimited investment options
- fees vary by company and account
- annual contributions capped at $5000 for 2008 ($6000 for age 50 or older)
- may contribute until 15 April of the following year
- required minimum distributions once you reach 70 1/2 years old
- non-working spouses may set up a spousal IRA
- minimum contributions vary by company
Roth IRA
- not tax-deductible (you invest money after you've been taxed on it)
- investment and earnings are tax-free at withdrawal
- limits on contributions based upon income level
- penalties for early withdrawal, though some exceptions do exist
- set up through your choice of companies
- unlimited investment options
- fees vary by company and account
- annual contributions capped at $5000 for 2008 ($6000 if age 50 or older)
- may contribute until 15 April of the following year
- no required distributions
- non-working spouses may set up a spousal IRA
- minimum contributions vary by company
As you can see, this is a lot of information. How do you choose? Ask yourself these questions:
- Taxes: do you want to pay them now or later? How large is your current tax liability? If you're already not paying any taxes, or you are receiving the Earned Income Credit, tax-deferment is probably not a benefit to you. Do you anticipate paying more or fewer taxes in retirement?
- Are you eligible for a Roth account, based upon your income level?
- How much flexibility do you want?
- How much money do you want to invest? Are you starting small, or do you have a chunk of money to invest each month?
- Do you have an investment company that you like? If finding an investment company is going to be hard for you, you might prefer to start with a TSP fund until you make a choice.
- Do you currently have tax-exempt income?
More useful information can be found at the Thrift Savings Plan website and USAA's Retirement Center. Each individual company that offers IRA accounts will have a comprehensive page of information available as well.
There is no right answer for every situation. Many people choose to have both TSP and IRAs. Even more important than your individual choice is the decision to start saving (or to increase your savings if you've already started.) Don't spend years deciding on the "right" account. Once you've reviewed your options, make a decision and get going!
