Max out your Thrift Savings Plan (TSP) Account

Similar to a 401(k) plan, the TSP permits you to make pre-tax contributions every time you get paid. You decide how much to allocate to your TSP, up to a certain limit. The TSP allocation is taken out of your gross pay, and your paycheck is reduced by that amount. The allocated amount goes directly into your TSP account, which you can invest in various funds. In 2015, FERS and CSRS employees can contribute up to $18,000 of their basic pay to the TSP.

Be aware that President Bush signed legislation (P.L. 107-304) on November 27, 2002 authorizing a program of “catch-up” contributions for TSP participants age 50 and over who are already contributing the maximum they can to the TSP without exceeding the IRS limit. The maximum allowable amount for catch-up contributions for 2015 is $6,000; thereafter, increases will be indexed to inflation. There are two tax benefits to investing in the TSP. First, your TSP contributions are taken out of your pay before taxes are computed. Second, taxes on contributions and attributable earnings are deferred until you withdraw your money.

The before-tax benefits of investing in the TSP are considerable. With before-tax contributions, the money you contribute is taken out of your pay before federal and, in almost all cases, state income taxes are calculated. Thus, the amount used to calculate your taxes is smaller and you pay less in taxes. By paying less current income tax, you have more take-home pay than if you had put aside an equal amount in savings after taxes were deducted. Your TSP contributions are excluded from the taxable income reported on the Form W-2, Wage and Tax Statement, that you receive from your agency each year. Thus, you do not report them on your annual federal tax return. This special tax treatment does not affect your salary of record for other federal benefits – such as the FERS Basic Annuity, the CSRS annuity, or life insurance – nor does it affect Social Security or Medicare taxes or benefits.

To give you an idea of the advantage of saving through before-tax contributions to the TSP, let us suppose that you are a CSRS participant earning basic pay of $30,000 a year. Let us also assume you are in the 15 percent tax bracket. If you contribute 5 percent each pay period (or $1,500 per year) to your TSP account, you will owe $225 less (15% x $1,500) federal tax in the current year than if you had not contributed to the TSP, but rather saved the $1,500 after paying taxes that apply to it. This is because when you save through the TSP, your contributions are not included in the amount on which your tax is calculated. The difference in your tax bill will be even greater if the state in which you live permits tax-deferred savings, as most states do.

By contributing to the TSP, you benefit from tax-deferred contributions and earnings in your TSP account because you defer (that is, postpone) paying federal taxes on the money you contribute until you withdraw the funds from your TSP account. In addition, over the years, the money in your account will accrue earnings. These earnings are also tax-deferred. This means that you do not pay income taxes on your TSP account contributions and earnings until you receive the money – usually after you retire, when your tax bracket may be lower.

Deferring the payment of taxes means that more money stays in your account, working for you. The longer your money is invested, the greater the benefit of tax-deferred earnings. Whether you can also defer state or local income taxes depends on the jurisdiction in which you live.

Another significant advantage for FERS (but not CSRS) employees is that they are entitled to agency matching contributions for their TSP accounts. If you are a FERS employee, your agency makes two different types of contributions to your TSP account as part of your FERS benefits. These contributions are not taken out of your pay, nor do they increase your pay for income tax or Social Security purposes.

First, when you become eligible for agency contributions, your agency will automatically contribute to your TSP account an amount equal to 1 percent of your basic pay each pay period. These are your Agency Automatic (1%) Contributions. You will receive these contributions whether or not you contribute your own money to your TSP account.

Second, if you are contributing to your TSP account, your agency also makes Agency Matching Contributions once you are eligible for them. If you do not contribute your own money, you will not receive Agency Matching Contributions. Matching contributions apply to the first 5 percent of pay that you contribute each pay period. Your contributions are matched dollar-for-dollar for the first 3 percent of pay you contribute each pay period and 50 cents on the dollar for the next 2 percent of pay. Your agency will not match the contributions that you make above 5 percent of your pay each pay period. However, you will still benefit from before-tax savings and tax-deferred earnings on these contributions.

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