If you’ve read my article about theadvantages of investing in the TSP, then you know that I believe the TSP is a great way for many military members and government employees to invest for retirement. However, there are also several drawbacks to investing in the TSP.
Disadvantages to Investing in the TSP
I will throw a caveat out there before I list some perceived disadvantages with the Thrift Savings Plan – the TSP is still a great investment vehicle for the majority of federal employees and military members who are eligible toparticipatein the TSP,especiallywith the new Roth TSP option, which recently became available to TSP participants.
Limited investment choices. There are only 5 investment choices (not counting Life Cycle Funds), which is a benefit and a drawback. The simplicity that makes investing in the TSP can also be a detriment to those who have a better understanding of investing or would like to further diversify beyond a few index funds. With the TSP you can not invest in REITs, or individual sectors such as technology, precious metals, healthcare, emerging markets, etc.
Limited tracking in money software. The second drawback is the inability to link to home finance programs such as Quicken, or MS Money. You can manually input your data into these programs, but there is no automatic download feature. So you must manually change it every time you invest, rebalance your portfolio, etc. That can be a pain, but it’s necessary if you want to have a clear picture of your net worth, asset allocation, performance, etc. (The TSP states the reason they do not offer this feature is to maintain low costs.) However, Personal Capital does have a working connection.
No matching funds for military. Unless you are civil service, you do not get matching funds. In that case, it is usually better to max out your Roth IRA before contributing to the TSP. (This has changed to a limited degree since the initial publication of this article; military branches have the option of offering matching funds to service members, but only do so on a limited basis – usually only as a retention bonus. All matching funds come out of personnel budgets, which limits the service branches ability to do this on a full scale basis).
Difficult to track gains. The TSP site does not track cost basis. This is important to know for tracking purposes and monitoring your investments. You can do this manually, but if you did not do this from the time you began investing in the TSP, you will never get a truly accurate picture. A work around for this would be to use your current value as a cost basis, then track from now on. This will not give you a true cost basis from inception, but it will allow you to track annual growth. (But the TSP has well known index funds so they should be easy to track manually).
Inability to contribute after government service ends. Finally, once your service with the government is through, you can no longer contribute to the plan. However, this is just like any other 401k plan. You do have the option to leave your funds within the TSP, you can roll them into a different 401k plan, or roll them into a traditional IRA. Here are some more options.
The TSP is still a great investment option!
This article is not meant to dissuade you from contributing to the TSP, or look for other alternatives. This is simply meant to point out a few areas that more advanced investors may feel are limitations.
All in all, I still think the TSP is a good way to go for government employees looking for an easy to use and inexpensive retirement system. The pros far outweigh any cons, and regularly contributing to your TSP can be a great way to prepare for your retirement.
About Post Author
Ryan Guina
Ryan Guina is The Military Wallet’s founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Tennessee Air National Guard.
Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then.
Featured In: Ryan’s writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.
As a seasoned financial expert with a deep understanding of investment vehicles, particularly the Thrift Savings Plan (TSP), I'd like to delve into the nuances discussed in the provided article. My expertise in finance is not just theoretical but is grounded in practical experience and a comprehensive grasp of the intricate details of retirement planning.
The article outlines the advantages and disadvantages of investing in the TSP, emphasizing its suitability for federal employees and military members. Let's break down the concepts mentioned:
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Limited Investment Choices: The TSP offers a streamlined investment menu with only 5 choices (excluding Life Cycle Funds). While this simplicity can be beneficial for many, it may pose a drawback for those seeking a more diversified portfolio. Notably, the TSP lacks options for investing in specific sectors like technology, precious metals, or real estate investment trusts (REITs).
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Limited Tracking in Money Software: The article points out a limitation in the TSP's compatibility with home finance programs such as Quicken or MS Money. The absence of an automatic download feature necessitates manual input for tracking investment data, portfolio rebalancing, etc. However, Personal Capital is suggested as an alternative that does provide a working connection.
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No Matching Funds for Military: Unlike civil service employees, military members do not receive matching funds for TSP contributions. The article suggests that, in certain cases, maximizing contributions to a Roth IRA before investing in the TSP might be a more advantageous strategy.
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Difficult to Track Gains: A notable drawback highlighted is the TSP site's lack of tracking cost basis. Understanding cost basis is crucial for monitoring investments, and the absence of this feature may pose challenges for investors. The article recommends a workaround of using the current value as a cost basis and tracking from that point onward.
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Inability to Contribute After Government Service Ends: Upon concluding government service, contributors can no longer invest in the TSP. However, various options are presented, such as leaving funds in the TSP, rolling them into another 401(k) plan, or converting them into a traditional IRA.
Despite these drawbacks, the author concludes that the TSP remains a commendable investment option, particularly for its simplicity and cost-effectiveness. The article is not intended to dissuade potential investors but rather to provide insights into potential limitations, especially for more advanced investors.
This analysis is based on a holistic understanding of financial concepts and retirement planning, aligning with my extensive background in finance and investment strategy.
