In 2001 military members finally got access to the Federal Government’s Thrift Savings Plan (http://www.tsp.gov). Until that time, military members could only save money tax deferred through traditional individual retirement accounts. A cursory review of any personal finance books or magazine articles will uncover a long list of the advantages to the individual of deferring taxes on current income and allowing gains in these accounts to also grow. The taxes are paid later, after years of compounded growth, and in years when regular income is controlled by the individual. This often allows him or her to pay less in taxes, while enjoying much larger returns on the investment.
Here’s a simple example. 2 lieutenants begin saving for their future. One invests $1,000 in his TSP, and the other invests $1,000 in a taxable account. Both enjoy a 12% growth rate. At age 60 the newly retired officers compare notes. The Lt with the taxable account boasts that he has amassed $26,437 on his small investment. The TSP investor smiles because he knows that his account now has $74,180 in it. While he understands that he’ll pay taxes on his withdrawls, his gains are so great that he doesn’t mind at all.
(Assumptions: 38 years, 12% interest, no additional contributions, 25% tax bracket. See http://fincalc.com/inv_07_o.asp for the calculator.)