FERS investors should structure their investments so that they can continue investing at least 5 percent of salary, the amount that produces the maximum government contribution. Image: JeannieR/Shutterstock.com
Some TSP Investors May Need to Act to Avoid Losing Matching Funds
A presentation at this month’s meeting of the TSP governing board called attention to the chance that FERS employees who invest at high rates may lose some government contributions to their accounts due to hitting the annual investment dollar limit too early.
The presentation highlighted that issue—which it called “saving too quickly”—as one of the themes in communications with account holders to help them get the most out of their accounts.
FERS investors need to structure their investments so that they can continue investing at least 5 percent of salary, the amount that produces the maximum government contribution, through every pay period of the year. Some employees invest at high rates early in the year in order to get money in the TSP sooner and take advantage of potential tax-advantaged growth for longer periods—that is, “front-loading” their investments.
The standard “elective deferral” limit this year is $23,000 (a combined limit for both traditional pre-tax TSP investing and after-tax Roth investing, for those making both types). For those age 50 or older—or who will turn 50 by year’s end—an additional $7,500 in “catch-up contributions” is allowed.
If FERS investors hit the dollar cap applicable to them before the last pay period of the year, their own investments will shut off until next year and so will government matching contributions worth up to 4 percent of salary (although the automatic 1 percent of salary government contribution would continue). Once lost, matching contributions can’t be recouped.
The presentation to the board said that of those notified last year that they were saving at too high a rate, a fifth made the needed adjustments and captured the full match. Those who made no adjustment “missed out on hundreds of dollars in matching on average.”
To prevent that from happening, investors might need to make a new investment allocation. A first step would be to discuss the situation with their payroll offices to determine how many pay distribution dates (not pay period ending dates, which are different) will remain in the year by the time they make a change, in order to set up their TSP withholding to their best benefit.
There is no similar consideration for CSRS investors, who get no government contributions.
The presentation said that other main themes of the communications strategy involve account growth potential for newly hired employees, investing enough to capture the full agency match at all ages, and considerations for using accounts for retirement income for those age 50 and older.
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See also,
How to Handle Taxes Owed on TSP Roth Conversions? Use a Ladder
The Best Ages for Federal Employees to Retire
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