New Opportunities in Retirement
Planning for the Military
Big Changes in Military Retirement Plan Mean More Opportunities
A new retirement plan for military personnel was unveiled recently by the Defense Advisory Committee on Military Compensation, a panel of compensation experts chartered by the Defense Department. The Committee formulated the plan according to nine principles: serving a specific force management purpose; increasing DoD flexibility; simplification; systems approach; expansion of choice; efficiency; cost transparency; leverage; and fairness, especially to those who currently leave service short of 20 years with no retirement. The vast majority of enlisted recruits and half of officers fall into that category.
The new plan includes provisions for earlier vesting of retirement and incentives in some occupations to serve beyond a 20 - year career. The new plan might be offered as a voluntary option, promising at least some retirement benefits to many members who don’t expect to serve 20 years. Under the current system, active duty members must serve at least 20 years to qualify for regular retirement.
Features of the new plan include government matching of Thrift Savings Plan contributions made by members, in the range of 5-10% of Basic Pay. Full vesting in these 401k-like defined contribution plans could occur after only five years of service.
The new plan also would offer full vesting in a retirement defined benefit program after just 10 years of service. The current annuity formula, of 2.5 percent of basic pay for each year served, would apply. So a 10-year retiree would get 25 percent of retired pay, although the formula would be extended through 40 years of service. In any case, however, the retirement annuity doesn’t start until age 60.
Furthermore, additional compensation can be obtained in one or more of the following forms: “gate pay” at various years of service, transition pay upon separation, and basic pay increases and bonuses.
There is no change to the retirement health benefit, which continues to vest at the completion of 20 years of service.
The Thrift Savings Plan
The Thrift Savings Plan (TSP) is a Federal Government-sponsored retirement savings and investment plan, established by Congress in the Federal Employees' Retirement System Act of 1986. The purpose of the TSP is to provide retirement income.
On October 30, 2000, the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 (Public Law 106-398) was signed into law. One provision of the law extended participation in the TSP, which was originally only for Federal civilian employees, to members of the uniformed services.
The TSP is a defined contribution plan. The retirement income that a deposit gets from his/her TSP account will depend on how much the individual has contributed to the account during his/her working years and the earnings on those contributions.
The TSP offers the same type of savings and tax benefits that many private corporations offer their employees under "401(k)" plans.
The TSP differs fromthe uniformed services retirement system, which is a defined benefit program. This means that the benefit received from the uniformed services retirement system (i.e., retired pay) is based on years of service and the rank held at the time of retirement, rather than on the amount of individual contributions and earnings, as is the case with the TSP.
In addition, unlike participation in the uniformed services retirement system, participation in the TSP is optional. To participate in the TSP, an individual signs up with his/her service. The individual contributes to the TSP from personal pay; the amount that is contributed and the earnings attributable to those contributions belong to the individual. (For more information on the Thrift Savings Plan, visit www.tsp.gov.)
Benefits of the Thrift Savings Plan
TSP contributions are taken out of pay before taxes are computed, so the individual pays less withholding tax.
TSP earnings are tax - deferred. This means there is no payment of Federal (and, in most cases, state) income taxes on contributions or earnings until the money is withdrawn, which is usually at retirement, when the individual is in a lower tax bracket.
The TSP investment can be diversified among different investment funds.
Any amount of money from certain qualified retirement savings plans can be transferred into the TSP. For example, if there is money in a 401(k) plan from previous employment, all or part of it can be transferred into the TSP.
Update on The Thrift Savings Plan
- Open seasons have been eliminated, meaning that contributions can be made at any time. Contribution elections are processed under new rules requiring elections to be made effective no later than the first full pay period after they are filed.
- Servicemembers have greater flexibility in investment planning under new options
- There is no longer a limit on the percentage of pay that can be contributed to the TSP. However, contributions may not exceed the Internal Revenue Service (IRS) elective deferral limit of $15,000 for 2006.
- Those who you are — or will become — age 50 or older during 2006 and will contribute the IRS limit, can make additional catch-up contributions of up to $5,000 this year.
- New funds based on asset allocation have been introduced,
- The uniform and federal service forms have been combined.
The TSP will now offer professionally managed life cycle funds that combine investments in the five existing TSP funds through various asset allocations (or investment mixes). Allocations will be tailored to different groups of participants according to their time horizon (time to retirement age) or when individuals plan on withdrawing their money.
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