When servicemembers transition from military to civilian careers, they have a lot to juggle. Where will they settle down? What are their skills, and how do those skills translate to a new career?
Through it all, one priority should remain top of mind: saving for retirement. You've likely taken advantage of the Thrift Savings Plan (TSP). But when contributing to your TSP is no longer an option, how can you continue to save for your retirement goals?
Read on for a roundup of the more common options for saving for retirement.
Transitioning your military TSP
As you leave military service behind, a common question is what to do with your TSP. As you are making decisions on how to continue to save for retirement, you also need to decide what to do with the TSP funds you’ve amassed thus far.
The good news is that you really don’t have to do anything and you can keep your funds in TSP. In many cases, that’s probably the best option. But because each person’s situation is different, I’ve written an article on 5 things to consider before moving your TSP. This should help guide you in making the best decision for you.
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How to save for retirement after TSP.
Saving for retirement continues to be a top priority as you transition from military to civilian life. But when contributing to the Thrift Savings Plan is no longer available, what options are out there? Let’s review a few of the more common saving vehicles. One option is an employer retirement plan, like a 401(k) or 403(b). These plans become an even bigger benefit when employers offer a matching contribution. For example, if the employer offers a 1-to-1 match on up to 5% of income, and the employee contributes 5% of their pay into the retirement plan, they get 5% for free from the employer’s matching contribution.
Even without access to an employer retirement plan, an Individual Retirement Account, or IRA, might be an option if meeting the eligibility requirements.
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An IRA comes in two basic flavors: a Roth IRA or a traditional IRA. The main difference comes down to taxes.
If eligible, a traditional IRA provides an up-front tax deduction. Contributions and growth then are taxed when withdrawn. A Roth IRA is the opposite. There is no up-front tax deduction, but withdrawals are tax-free if meeting the account requirements. Find more information in IRS Publication 590-A.
Even a stay-at-home spouse who doesn’t have earned income can contribute to their IRA through what’s known as a spousal IRA. The nonworking spouse can contribute to their IRA out of the earned income from the wage-earning spouse. Keep in mind that the amounts contributed to both the worker IRA and the spousal IRA can’t exceed earned income.
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Since many veterans are self-employed or business owners, what are some ways they can save for retirement?
Here are a few plans that might be available:
- Savings Incentive Match Plan for Employers, or SIMPLE IRA, is for businesses with up to 100 employees.
- Simplified Employee Pensions, or SEPs, provide a way for business owners to contribute toward their employee’s retirement plans as well as their own. With an SEP, only the employer can contribute.
- One-participant 401(k)s, also called solo-401(k)s, may be an option for a business owner who has no employees other than a spouse.
Also, don’t forget self-employed individuals still have access to IRAs if they meet the requirements. For more information on retirement plans for small business, check out IRS Publication 560.
As you can see, there are plenty of options to save for retirement even after leaving the military. Saving for retirement is probably the largest savings goal you have, so make it a priority, do your research and choose the best option for you.
Description of visual information: [For more information about IRAs, visit usaa.com/ira
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Prior to requesting an IRA rollover from a qualified retirement plan (Plan) account or Thrift Savings Plan (TSP) account, consider whether such a rollover is appropriate for you. A TSP is a retirement plan for military or civilian employees of the U.S. government. Although IRA rollovers may have certain advantages, Plan/TSP accounts have advantages you should consider before proceeding which may include, but are not limited to, low administrative and investment expenses and, if you separate from service at age 55 or older, you have penalty-free access to your Plan/TSP account funds. Additionally, you may want to consider maintaining at least a minimal Plan/TSP account balance because, in the event you want to transfer or rollover qualified assets to your Plan/TSP account in the future, to the extent it is allowed by your Plan/ TSP, you may be required to have an open Plan/TSP account with a balance when your request is received by that Plan/TSP. You should consult your tax advisor regarding your specific situation to determine whether a Plan/TSP account rollover to an IRA would be suitable for you.
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Maximizing your retirement savings after military services
Let’s look at several options that might be available to you as you continue to save for retirement, an important goal for almost every person.
Employer retirement plans
Many organizations offer employer-sponsored retirement plans, such as 401(k)s and 403(b)s, as a benefit to help provide their workers with income in retirement.
These plans are an even bigger benefit if the employer offers a matching contribution. For example, if a company offers a 1-to-1 match on up to 5% of income and you contribute 5% of your pay into the retirement plan, you'll get another 5% free from the employer's matching contribution. At USAA, we call this "free money." Don't leave it on the table.
Roth or traditional IRA
Even without access to an employer retirement plan, one option is an Individual Retirement Account, or IRA. An IRA is a retirement vehicle that allows money to grow tax deferred. An IRA comes in two basic flavors: Roth or traditional. The main difference comes down to taxes and IRS eligibility requirements.
If eligible, a traditional IRA provides an up-front tax deduction. Contributions and growth are then taxed when you withdraw money during retirement. A Roth IRA is the opposite. There is no up-front tax deduction, but withdrawals are tax-free if meeting the requirements. Find more information in IRS Publication 590-A.
Even a stay-at-home spouse who doesn't have earned income can contribute to their IRA through a spousal IRA. The nonworking spouse can contribute out of the earned income from the wage-earning spouse. Keep in mind that the amounts contributed to the worker IRA and the spousal IRA can't exceed earned income. Read more in our Roth versus traditional IRA quick guide.
Options for entrepreneurs
Since many veterans are self-employed or business owners, what are some ways they can save for retirement?
While the following list is not exhaustive, these are some of the more popular retirement saving plans for small businesses:
- Savings Incentive Match Plan for Employers, or SIMPLE IRAs, are for businesses with up to 100 employees.
- Simplified Employee Pensions, or SEPs, provide a way for business owners to contribute to their employees' retirement plans, as well as their own. Only the employer can contribute to an SEP.
- One-participant 401(k)s, also called solo 401(k)s, may be an option for business owners who have no employees other than a spouse.
Remember that self-employed individuals still have access to IRAs if they meet the requirements. For more information on retirement plans for small businesses, check out IRS Publication 560.
TSP for federal employees
Many military members continue their service to their country by becoming federal employees. In fact, according to a 2021 report by the Interagency Veterans Advisory Council, 31% of all federal employees are veterans.
The good news is that the TSP is still available to some federal employees Opens in a new window. See note 1 The TSP website shows they're eligible to participate if they are a:
- Federal employee covered by the Federal Employees Retirement System (FERS).
- Federal employee covered by the Civil Service Retirement System (CSRS). Note: CSRS participants don't receive automatic or matching contributions, but this scenario is rare because it was replaced by FERS for anyone hired on or after Jan. 1, 1987.
- Civilian in certain other categories of federal service, such as some congressional positions and some justices and judges.
TSP benefits can vary between the different retirement systems, so take some time to understand the differences.
Here's an example of one difference: Those under the FERS retirement plan are eligible to receive an automatic contribution of 1% and up to 4% of additional matching contributions, similar to the Blended Retirement System, or BRS. However, the vesting periods can be different. Under FERS, the vesting period is either two or three years, depending on the job. BRS only has a two-year vesting period.
If someone has a military TSP and then joins the federal government, the account number stays the same. The sections are just divided into military and civilian sides. Once they separate from military service, they can combine the two through a TSP-65 form. This is common for Reserve members who are also civilian federal employees.
As you can see, there are plenty of options to save for retirement when you transition from a military career to a civilian one. During this stage of your life, an important piece of advice is to just keep saving. Make it a priority. Do your research and choose the best options for you.
Ready to continue your retirement saving journey?
Take the next step by visiting USAA’s investing retirement hub.