The military is often slow to change.
This isn’t always a bad thing as too many companies follow fads that nearly always fade. But the retirement plan that’s been offered to the military has largely been unchanged for some time.
It’s certainly been a beneficial retirement system for military members. However, it’s put a majority of the responsibility on the government rather than it’s soldiers.
Who should have that responsibility is not a debate I’d like to have at this time, however, it’s quite obvious that something needed to change. On November 25, 2015, President Obama signed the 2016 National Defense Authorization Act (NDAA) into law.
The debate that ensued was largely on how to save the Department of Defense from the rising pension costs provided to military members. The real problem, however, was in deciding what level of benefits the government should provide to its’ service members.
What has come about is the new Military Retirement Plan. In many ways, the new retirement plan is similar to what was done in 1984 when Ronald Reagan fixed the short-term Social Security problems by moving federal employees from the Civil Service Retirement System (CSRS) to the new Federal Employee Retirement System (FERS.) This change
In many ways, the new retirement plan is similar to what was done in 1984 when Ronald Reagan fixed the short-term Social Security problems by moving federal employees from the Civil Service Retirement System (CSRS) to the new Federal Employee Retirement System (FERS.) This change put more of the responsibility on employees and less on the government by lowering their pension, but giving them a 5% match to their TSP as well as Social Security.
All this said, the new Military Retirement System is set to take effect on January 1, 2018, and offers some BIG changes.
Here are 10 facts relating to the new program:
1. Military Members Can Now Receive up to 5% Matching Contributions to the TSP
This is a HUGE benefit! It’s also the reason this is the number 1 fact on my list.
I’ve talked about it often, but the biggest mistake federal employees make with their TSP is not contributing the 5% to receive the match. This mistake will now also extend to military members.
Members of the Armed Services who decide to select the new plan will be able to receive matching contributions to their Thrift Savings Plan. So, if you decide to contribute 5%, the government is going to contribute that same amount right back to you. That’s a 100% rate of return, automatically!
Now there is a caveat, of course, military members will not be eligible for the match until the start of their third year of service. I’m sure this is to keep their costs down, but either way, once you’re eligible, it’s a great opportunity to have.
2. 5% of Base Pay Must Be Chosen Ahead of Time.
The 5% matching contributions are similar to FERS employees. However, one way it differs is that service members must have at least 5% of their base pay dedicated to the Thrift Savings plan starting January 1 of the year they plan to contribute.
If they fail to have, the 5% contributed they will receive a rate that is effectively less than 5%. Therefore, it’s important as with anything to stay abreast of what is happening with your benefits. Have the paperwork filled out and election chosen BEFOREHAND; don’t wait until the last minute like so many and be left in the dark.
3. The Matching Contributions Cannot Go to the Roth TSP
The Roth TSP and Traditional TSP are very different. Just like the Roth TSP and Roth IRA are different as shown in our showdown.
The main difference between the Roth TSP and the Traditional TSP is how they’re taxed. The Roth will have taxes paid upon contribution while the Traditional will have taxes paid upon withdrawal.
For many people starting out in their career, contributing to the Roth TSP is most beneficial due to their tax rate most likely being lower than it will be later in life.
Unfortunately, even though the decision on where contributions go can be made by service members, they do not have a choice on where the matching contributions from the Department of Defense go. All matching contributions will automatically be made to the Traditional TSP, just like it is for all other federal employees.
4. A 1% Contribution Will Automatically be Made to the TSP for Military Members
This is another benefit of the TSP that is being adopted from what is given to federal employees. Whether a military member decides to contribute to the TSP or not, as a benefit, the Department of Defense will contribute 1% to the TSP for them automatically.
If you’re currently serving and elect the new retirement plan, you will begin receiving the automatic contribution on January 1, 2018. However, if you join after December 31, 2017, the Department of Defense will contribute 1% of your base pay to the traditional TSP starting approximately 60 days after your first day of service.
5. Military Members can Transfer Their TSP to an IRA after Service
Here’s a quick stat for you. Only 17% of military members serve 20-years and make it to retirement.
That means 83% of military personnel don’t even make it to the point where they can receive a full pension. That’s pretty unfortunate.
With the new program, however, you don’t have to make it to 20 years of service to receive some retirement benefit. Now, service members will be able to receive a 5% match to their TSP contributions on the third year of service.
This is a great benefit for military members and may contribute to fewer feeling the need to serve a full 20 years to receive some retirement benefit.
6. The New Military Retirement Plan will Lower Pension Amounts
Although there are some significant new benefits with the new Military Retirement Program, one downside is the fact that pension amounts for those serving 20 years or longer will likely be lower.
Currently, service members receive the number of years in service times 2.5 to calculate the percentage of base pay they can expect to receive in retirement. For the most part, they need 20 years of service to retire and once achieved you’ll receive 50% of your base pay.
Under the new plan, if chosen the 2.5 multiplier reduces to 2.0, so rather than receiving 50%, military members would then receive 40% of their base pay at 20 years.
Also, something to be aware of, after 26 years in service, the 5% matching contributions to the TSP will go away, but the 2.0 multiplier can still be earned until official retirement.
7. Military Members Have Until December 31, 2018, to Choose a Plan if They Joined After 2005
This is specifically for those service members who have less than 12 years of service before January 1, 2018, at which time you will HAVE to choose between the two plans. The election period stems from January 1 to December 31, 2018, and Soldiers with more than 12 years of service will have to keep the old retirement plan.
8. There Are a Couple of Exceptions for the Plan Selection Deadline
As with anything, there are a few loopholes on getting around deciding between the two retirement systems.
Military members who file a hardship clause will have the opportunity to be determined appropriate by the Secretary of their specific branch of the Military. There’s also what’s known as the break in service clause.
If you exit the military and decide to rejoin after 2017, you will have 30 days to select either plan at the time of returning to active duty.
If you have less than 12 years of service, you can decide to have the matching TSP contribution plan or stay with the old system. There are positives and negatives to both, but if you’re someone who will take advantage of the 5% match, it could be a GREAT benefit as seen by so many federal employees under the FERS program.
9. The Old Plan Can be Kept if You Join Service before December 31, 2017
If you’re trying to decide whether to join the Military or not, if you join before December 31, 2017, you will have the option of staying on the old system. The benefit to this is you’d receive 50% of your base pay after 20 years of service if you’re considered Active Duty.
Making the decision between the two systems is a difficult one that should take much time and planning.
10. One Option is Not Better Than the Other
There’s really not a clear answer as to which program is best.
The best advice I can offer is this: If you’re going to take advantage of the TSP match and be studious in your TSP investing, it could be totally worthwhile.
The problem, as I see just about every day, is that too many federal employees check their TSP performance very rarely. In fact, some check it so little that they have no idea what they’re even investing in. See the new program as an opportunity to be better prepared for retirement rather than an unwanted change.
– Cooper Mitchell