Blended Retirement System

The Blended Retirement System (BRS), which launched on January 1, 2018, retains the strengths of a pension-based system while adding a robust defined contribution plan that actively encourages — and also rewards — saving for retirement.

TAX-DEFERRED GROWTH

In all DC plans, the money you and your employer contribute to your account compounds tax deferred. This means no tax is due on your earnings until you begin withdrawing from the account years later. At that point, you pay tax on the withdrawals at the same rate you pay on your other ordinary income. When taxes are deferred, earnings can accumulate faster since money you would otherwise have to use to pay taxes can keep growing in your account. The only downside is that earnings in a DC account aren’t guaranteed. This means in some years the value of your account may be flat or even shrink. But over the long term, you can expect compounding to help your account grow larger, potentially substantially larger.

There is, however, a trade-off for tax deferral. With few exceptions, you give up access to your account value until you’re at least 59½. If you withdraw earlier, the tax you’ve deferred is due when you file your tax return for that year. You’ll also owe a 10% tax penalty. That’s because tax deferral is an incentive to save for retirement. So if you use the money for something else, it will cost you.

There’s another concession you make for tax-deferred growth: You must begin withdrawing from your TSP or other DC account when you turn 70½. If you don’t, you’ll face significant penalties.

SAVING, FRONT AND CENTER

With its focus on tax-deferred saving, the blended system modernizes the DoD retirement plan. It also makes the system more equitable by addressing the long-term needs of all servicemembers, not just those who make the military their career.

To achieve this objective, the DoD has enhanced the role of the Thrift Savings Plan (TSP), making it a key element of retirement planning. Here’s a brief summary:

• You’ll be part of the blended system, with a TSP account established in your name.
• You’ll make contributions to the account from your base pay.
• The DoD will automatically contribute 1% of your monthly base pay to your account starting on your 61st day of service.
• After you’ve completed two years of service, you’ll be eligible for matching contributions from the DoD.

WHAT’S YOURS IS YOURS

Vesting in your TSP account works differently from vesting in the military’s pension system.

Your contributions to your TSP account, plus any earnings those contributions generate, are always yours, regardless of how long you serve.

After two years of service, you’re fully vested in the automatic 1% contributions that the DoD has made, plus any earnings on those contributions.

At that point, you also begin to qualify for matching contributions. You’re immediately vested in the matching amounts the DoD adds to your account and any earnings they produce.

All your vested assets are portable, which means you can take them with you when you leave the military. The only amount you risk forfeiting is the 1% the DoD adds to your account during your first two years of service. But that happens only if you leave the military before beginning a third year.

You can move your assets to another tax-deferred account if you don’t want to leave them in your TSP account. What you don’t want to do is take your TSP savings in cash. If you do, you’ll owe income tax plus a potential 10% tax penalty.

BALANCING GOALS

It always pays to contribute the full 5% of base pay to your TSP account so that you qualify for the full DoD match. The only reason to contribute less is if you’re putting money aside to create or replenish an emergency fund as a cushion against unexpected financial problems. For example, you might need this money if your spouse lost a job or your car needed major repairs.

Another resource you can tap into if you’re facing a financial challenge is a loan from your TSP account. In the first few years, when your account balance is small, the amount you can borrow may not be enough to meet your need. But as your balance grows, borrowing in this way may be preferable to taking a commercial loan.

TSP loans do have to be paid back with interest. And, while the loan is outstanding, growth in your account is stalled. But as long as the loan is just a temporary interruption, you should be able to get your savings back on track.