There's a lot of stuff happening when you leave the military. (Is that not the biggest understatement ever?) One little tidbit that often gets missed is that there is no contribution to the Thrift Savings Plan during your last month of active duty. If you're trying to cram some more money into this low-cost, tax-advantaged retirement account before you leave the service, you'll need to plan to do it before that last month.
I'm not exactly sure why this works out this way, but I have a hunch. Deductions are made from your military pay during each month, but the contributions aren't sent to your Thrift Savings Plan account until the beginning of the next month. For example, if you have money deducted from your military pay in May, that money will be contributed to your TSP account in June. But you have to be serving currently to contribute to TSP. Because of the delay between the deduction and its transfer to the TSP, if money were deducted from your last month's pay, the TSP would be receiving the money after you no longer were serving. I think this is the reason that you can't contribute during your last month of service. But whether I'm right or not, the fact is that you can't contribute. The Defense Finance and Accounting Service will suspend your TSP contributions automatically after the end-of-month paycheck for the month prior to your separation.
So what does this mean for you as you plan your transition? Well, it means that you're going to have a bigger paycheck during that last month. That's a nice thing and can help increase your transition fund right before you need it.
But it also means that you will miss that opportunity to make a contribution for that month. And, if you are in the Blended Retirement System, you won't receive government matching contributions for that last month. Depending on your overall financial plan, you may want to adjust your contributions for the months prior to separation so that you reach the desired contribution amount for the time you're serving.
If you are planning to pursue work after leaving the military, you may want to consider how your military TSP contributions may impact your ability to contribute to your new employer's retirement plan. The total annual limit for contributions is combined between the military TSP and a civilian TSP account, or a private employer's 401(k) plan. This may be important if your new employer offers an employee match. While most of us don't know for sure what sort of benefits will come with post-military employment, it's a good idea at least to think about how things might unfold so that you're making informed decisions along the way. In the most extreme example, if you contribute a ton to TSP before separating, you may find yourself unable to contribute to an employer plan and you could miss out on their matching funds, which may be a large part of their retirement package.
If that entire last paragraph is making your head spin, consider meeting with a fee-only financial adviser who understands military pay and benefits.
There's no single right way to handle the curtailing of TSP contributions before leaving the military, but understanding that it will happen is the first step in making sure that you're using your money in exactly the way that you want to use it. And congratulations on your new phase of life!
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