Make most of your TSP for 2010 retirement savings

This is my last Money Matters column for 2009, so I’ll take the opportunity to remind those of you who are still active federal employees to carefully plan your retirement savings contributions for the coming year.

Unless there is a compelling reason to do otherwise, I strongly recommend you first direct your retirement savings contributions into your Thrift Savings Plan account — before you contribute to any other accounts. You should contribute the maximum allowed to your TSP account — which in 2010 is $16,500 if you are under age 50, or $22,000 if age 50 or older — before you contribute to a traditional IRA, Roth IRA, mutual fund, bank, brokerage, deferred annuity, cash-value life insurance or any other type of investment account for retirement savings.

No other investment vehicle is likely to provide you with a comparable retirement savings solution. This is true for all participants, but particularly so for those covered by the Federal Employees Retirement System. FERS employees’ primary investment objective should be to obtain the full 5 percent match in contributions from their employer.

Aside from the free money FERS employees get through employer contributions, the TSP offers a package of advantages unmatched by alternative investments:

* Tax deferral. The TSP allows you to do something that you should generally strive to do — avoid paying tax bills now in favor of paying them later. Contrary to all of the incompetent, misleading “analysis” encouraging you to do the opposite — think of the Roth IRA conversion propaganda — deferring taxes on current income and its growth is the smart choice for most people.

* Low cost. Investing isn’t free. As a prudent investor, you either contribute your time and effort to manage your investment portfolio or you pay someone else. In the case of the TSP, professionals do most of the work for you, and they do it well and for next to nothing.

* Superior rates of return. The TSP’s low costs likely translate into rates of return that are superior to those for higher-cost alternatives with similar risk characteristics.

* The G Fund. The TSP’s G Fund offers an unmatched combination of relatively high return and low risk. If you can find a better stable value investment, I’d like to hear about it. That doesn’t mean you should allocate most or all of your account balance there, but it does provide a unique and valuable investment option.

* True diversification. The TSP’s five core funds provide efficient and effective internal diversification, both on their own and when used together through an appropriate asset allocation scheme. Producing the return you need with the minimum possible risk should be your primary goal as the manager of your TSP pension fund.

* Simplicity. The TSP’s simplicity — just five core index funds — is a key advantage over many alternatives. Don’t let this simplicity fool you, however. By combining those five funds in the right ways, and managing their allocation properly, you can cover the range of risk and return available from the investment markets and tailor your account to meet nearly any need. Don’t be fooled into believing that complexity brings superior results.

* Convenience. The TSP is easier to track and manage than comparable alternatives.

* Flexibility. The TSP allows you to continue to invest and manage your money for life, if you choose, or to withdraw your money to buy an annuity, invest elsewhere or spend as you please once you retire. In-service withdrawals are also allowed under certain circumstances, and you’ll have penalty-free access to your money if you separate from service during or after the year in which you reach age 55 — a break that an IRA doesn’t offer.