Servicemembers have another retirement option. The government-sponsored Thrift Savings Plan(TSP) generally works like a 401(k) plan offered by some civilian employers.

You may contribute any whole percentage of your basic pay, bonuses, incentives or special pays, before federal income taxes, up to an allowable maximum. The plan offers a variety of options.

Features Of A TSP

You can contribute to the TSP and to an IRA, although your IRA contribution may not be tax deductible based on IRS rules. You can borrow from your TSP account penalty. Repayments and interest go back into your account.

You are subject to federal income taxes and penalties if you withdraw your money before you are age 59½ . If, however, you separate from military service at age 55 or older, withdrawals from your TSP are not subject to IRS penalties.

When you leave military service you have several options with your TSP.

Take the money in a lump sum.
Select an annuity.
Establish monthly payments.
Leave the money in the TSP until you must withdraw at age 70½.
Roll over into an IRA or other retirement account.

To learn more about the TSP, visit the Thrift Savings Plan Web site at www.tsp.gov.

Tax Relief For Military Families

A provision of the Heroes Earnings Assistance and Relief Tax Act of 2008, or HEART Act, includes tax-free savings options for individuals who receive military death gratuities or payments under the Servicemembers' Group Life Insurance (SGLI) program. The death payment can be rolled over, free of federal income tax, to a Roth IRA and/or Coverdell Education Savings Account. The full amount can be rolled over regardless of other income or contribution limits that may apply.

This allows military family members to realize the potential long-term benefits of tax-free earnings on investments.

Updated Thursday, January 28, 2010