John Grobe, Federal Career Experts
After reading recently that the most popular TSP withdrawal choice was installment payments of a fixed dollar amount, I wondered which method of contribution was the most popular contribution choice; was it fixed dollar or was it percentage of salary? Contacting the TSP and asking if they knew didn’t work well. Our contributions are handled by our agency’s payroll provider and the TSP doesn’t have access to that information. The rest of this article will look at the pros and cons of the two different methods of making contributions to the Thrift Savings Plan.
Percentage of salary is a time honored way of putting money in the TSP. In the past, TSP contributions were limited to a certain percentage of salary, not by the IRS elective deferral limit ($20,500 in 2022). Back in the beginning, FERS participants were limited to 10% of their salary and CSRS participants were limited to 5%. That increased to 15% and 10% respectively until the point where percentage limits were abandoned and the IRS elective deferral limit was made the limit, regardless of what % of salary it equaled.
What’s good about a percentage based contribution?
• It goes up every time your salary goes up.
• It’s easy (you don’t have to do math) to increase it; just up it by one percent when you can.
• If you are financially unable to reach the IRS elective deferral limit, percentages are an easy way to go.
What’s not so good?
• If you’re highly compensated, choosing a percentage of salary might result in you reaching the elective deferral limit prior to the end of the year; thereby losing out on some matching contributions.
What are the benefits of a fixed dollar amount contribution?
• You can divide the elective deferral limit by the numbers of pay dates in a year and pick an amount that lets you reach the elective deferral limit in the last pay period of the year; thereby ensuring yourself of the full match.
What’s not so good?
• You have to “do the math” every year to ensure that your contributions take you right to the limit and no further.
• Your contributions will not automatically increase with every pay increase.
What would I recommend? If you have the financial wherewithal to fully contribute to the TSP, you should contribute up to the IRS elective deferral limit and re-do the math every year. If, on the other hand, the elective deferral limit is out of your reach, you should go with a percentage so that your contributions increase as your pay does.