TSP

The flip side of under-investing in the TSP is the risk of investing too much, too fast.

The tax code sets an annual cap—called the “elective deferral limit”—on the amount that you can elect to invest in a tax-advantaged retirement plan such as the TSP—in 2020, $19,500.

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FERS employees should keep the limit in mind when deciding how contribute to a TSP account. You could lose the opportunity to receive some agency matching contributions if you reach the annual maximum too quickly, because you only receive agency matching contributions on the first 5 percent of your basic pay that you invest each pay period.

If you reach the annual limit before the end of the year, your investments (and your agency matching contributions, although not the automatic 1 percent of salary contributions) will stop. As a result, you will not get the full amount of agency matching contributions that you could have received if your own investments had been slightly less each pay period, but had continued throughout the entire year.

Note: Only individual investments, and not any transfers from other retirement plans or employer contributions on behalf of FERS employees, count against the limit; however, the limit applies to the combination of traditional and Roth investing, if you invest in both types of balance.

The bottom line is that if you are in FERS, you should structure your payroll withholding so that you can continue to invest at least 5 percent of salary throughout the entire year. The key is the date the agency makes pay distributions, not the ending date of a payroll cycle. (The actual investment in the TSP may be made on yet a different date, but that does not matter for these purposes.)

Check with your payroll office. In most cases, there are 26 such dates in a year, but due to calendar or payroll administration quirks sometimes there are 25 or 27. Also bear in mind that those dates vary among agencies and even among different branches and sites within some agencies, depending on the payroll provider being used. That could be a consideration if you make any type of job change during the year.

This is not an issue for those under the CSRS system since they get no government contributions in any case.

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