The TSP is designed to supplement your retirement benefits in a tax-effective manner. Contributions from taxable income are invested on a tax-deferred basis, while contributions from tax-free income (such as combat-zone pay) remain tax-free status. When you arrange to have a portion of your taxable income invested in the TSP, you immediately save money on taxes. In other words, when you contribute $100, your net paycheck may be reduced by only $85, because the contribution isn't taxed until you use it when you retire. Yet you will be able to invest the entire $100. You'll pay tax on the amount that the $100 becomes in the future. TSP information is subject to change, so check for updates at http://www.tsp.gov.

Thrift for Retirement
Investing in the Thrift Savings Plan (TSP) for your retirement is a no-brainer! Quite simply, you should invest as much as you can afford in the TSP because:

• You save money on income taxes.
  
  
• 100 percent of the money you have deducted from your pay goes into your investment account, and no income tax is deducted. If, for example, you are in a 10 percent tax bracket and you contribute $100, your net pay goes down by only $90.
  
  
• All of the earnings on your account are tax-deferred. You don't pay the tax until you withdraw money, usually during retirement.
  
  
• Contributions of your tax-exempt combat or hazardous-duty pay retain their tax-exempt status, so you won't pay tax on this money, even when you withdraw it. (Earnings on your tax-exempt contributions are tax-deferred until they are withdrawn. There is also pro-ration of amounts-see below.)
  
  
• You may be eligible for matching contributions if you serve in a critical specialty.
  
  
• This is free money that results in an immediate return of as much as 100 percent on your contributions. If you don't contribute, however, you can't earn the match-even if you work in a critical specialty.
  
  
• If you need access to your money, you can borrow from your TSP at a low rate of interest.
  
  
• Personal loans can be for up to five years.
  
  
• Loans to purchase your residence can be for up to 15 years.
  
  
• Your loan is repaid through payroll deductions; it's like borrowing from yourself.

Start Contributing Now
The first step is to complete a TSP election form (TSP-U-1), using these guidelines:

• To calculate your contribution (per paycheck) to the TSP, multiply that amount by 1.111. Figure out how much to contribute.
  
  
• If you can do without $40 per paycheck, put in for a contribution of $44.44. Your TSA account will get the full $44.44, and your net pay will go down only $40!
  
  
• Put your incentive pay or special pay (including bonus pay) into the TSP.
  
  
• You can earmark a portion (up to 100 percent) of these extra pays to go directly to the TSP. It's a smart use of extra money. If you can't put it all in, consider putting in half. [You cannot participate with your extra pay unless you also have some contribution coming out of your base pay.]
  
  
• If your account earns 7 percent per year, your $40 per month will grow to nearly $47,000 in 30 years.

Allocate Your Investments for the Long Haul
All of the investment choices available in the TSP offer diversification to reduce risk, but only the Government Securities fund (G) guarantees that you won't lose money. It would be prudent to invest any TSP funds that you anticipate withdrawing within five years in the G fund. You will earn a medium-term (four-year-plus), government-securities return on your money in an investment that you can turn to cash at any time.

Higher Returns Mean Higher Risk
The more risk you take, the better the chance of making more money. The following asset allocations, based on your stage in life, are recommended. (Your risk tolerance should also be considered. If you can't sleep at night knowing that your investments may lose money, then you may just want to allocate all your investments to the G fund.)

• Up to age 54: 5% G; 15% Fixed Income (F); 30% Equity Index (C); 40% Small Cap Stock Index (S); and 10% International Stock Index (I).
  
  
• Ages 55 to 64: 20% G; 20% F; 30% C; 20% S; and 10% I.
  
  
• Retirement years: 40% G; 20% F; 20% C; 15% S; and 5% I.
  
  
• You can start an asset allocation program by choosing the above
  percentages of your regular contribution to be invested in the different funds.
  
  
• You should take a look at how your investments are allocated every year or two. Investment performance (gains and losses) will change the percentages over time.
  
  
• You can rebalance your asset allocation by making transfers among your different investments groups.

Lifecycle Funds
If you do not want to take the time to constantly adjust your asset allocation, then consider using a Lifecycle Fund (L Fund).  The L Funds provide you with a convenient way to diversify your account among the G, F, C, S, and I Funds, using investment mixes that are set to different time horizons. Your “time horizon” is the date (after you leave Federal service) that you think you will need the money in your TSP account. Because it is important for each L Fund to maintain its target investment mix, the TSP will automatically rebalance each L Fund daily. Then, each quarter, the investments in each L Fund will shift to a slightly more conservative mix.

Don't Touch Your Money Before Retirement
Any time you take money from your fund, you are taking money out of your retirement. The best plan is to never touch the money until you retire. Sometimes you find yourself in financial trouble. Before you take out money, consider taking a loan from the plan-borrowing money and paying yourself back.

• You must pay taxes and possibly penalties on your withdrawals. Loans let you pay yourself back over time, and all your money keeps working for you. But the interest you pay yourself back may be less than you would have earned if you hadn't touched the money.
  
  
• Wait until you reach age 59-1/2 to withdraw money penalty-free from your TSP.
  
  
• You will have to pay tax on the money you withdraw (except for any tax-free funds from combat or hazardous-duty pay), but you won't have to pay an additional 10-percent penalty.
  
  
• If money is needed for income, you can withdraw substantially equal amounts over your lifetime, without paying the 10-percent penalty.
  
  
• The calculations are quite complex, so seek advice from a tax professional.
  
  
• Note that if some of your TSP is tax-exempt, you cannot withdraw only the tax-exempt portion. The IRS forces you to prorate the amount taken out. As a result you will pay tax on some of your withdrawal, and you also may owe a penalty. Again, consult a tax professional.