John Grobe, Federal Career Experts
Thrift Savings Plan participants are allowed to contribute to the TSP up to the “elective deferral limit” which is set by the Internal Revenue Service each year. For 2016, the limit is $18,000 per year, just as it was in 2015. The limit is raised in increments of $500. Given the relatively low inflation we are experiencing; I suspect that the limit will remain at this level for 2017. The IRS usually announces the next year’s elective deferral limit in October and the TSP posts it on their website soon thereafter.
You can contribute up to the elective deferral amount whether you are CSRS or FERS. This is a far cry from the original limits of 5% of salary for CSRS and 10% of salary for FERS, and allows employees to get more money in the TSP than before. If you are a FERS employee making $60,000 the odds are good that you cannot afford to contribute $18,000, but you can still likely afford more than 10% of your salary.
If you are FERS the government matches the contributions you make towards the elective deferral limit as follows:
Employee Contribution and Agency Matching Contribution
Employee 0% Agency Matching 1%
Employee 1% Agency Matching 2%
Employee 2% Agency Matching 3%
Employee 3% Agency Matching 4%
Employee 4% Agency Matching 4.5%
Employee 5% Agency Matching 5%
As the government’s match is done on a pay period by pay period basis, it is important to contribute to the TSP each and every pay period of the year (if you are a FERS employee) lest you lose the government match. This applies to the 4% that is the actual match, not the 1% agency automatic contribution. This is a problem for highly-compensated employees (though being highly compensated is not a problem in itself); here’s an example of how someone could miss out on the “free money” from the match.
A FERS employee makes $120,000 a year and elects to contribute 17% of their salary to the TSP. That amount comes out to $785 per pay period and the employee hits the elective deferral limit with three pay periods remaining. Though the employee will still receive the 1% agency automatic contribution, they lose out on $543 of agency matching funds.
You do not have to select a percentage of your salary as a contribution; you are allowed to choose a specific dollar amount. In a 26 pay day year, $693 per pay period would ensure you hit the limit with your final paycheck of the year. If the year had 27 pay days, you would elect $667 a pay period.
If you’re FERS, it’s important to note that the $18,000 is the amount of money that you can put in, the government match is over and above that amount. If you made $100,000 and contributed the full $18,000, the government would match $5,000 and you would end up with $23,000 added to your account.
Many of you reading this article are age 50 or older; that fact lets you contribute even more to the TSP. Those who are 50 or older (this includes the year in which you turn 50) can contribute an extra $6,000 per year in what are called “catch up” contributions. You must be on track to contribute the full $18,000 elective deferral amount in order to make catch up contributions.
Like the elective deferral limit, the catch up amount is set by the IRS each year and is raised in $500 increments. I suspect that the catch up amount will remain at $6,000 for the next several years. There is no match on catch up contributions, so you don’t have to spread them out over the year. If you choose to do so for budget reasons, you would elect $231 in a 26 pay day year and $223 in a 27 pay day year.
Let’s go back to that FERS employee who is making $100,000 a year and is contributing the full $18,000 to the TSP; if they happen to be 50 or over, they can throw in an additional $6,000. This means they will have added $29,000 to the TSP ($18,000 elective deferral amount; $6,000 catch up contribution; and $5,000 government match); at that rate, they will have a robust TSP account by the time of their retirement.
You make your contribution allocations through your agency’s payroll interface (e. g., Employee Express, EBIS, etc.). You can change these allocations each pay period if the spirit moves you to do so. In the early days of the TSP there were only two “open seasons” a year in which you could change your contribution allocation. A caveat for those readers who have Roth balances in their TSPs: any contribution allocation decisions you make will be applied proportionally to your Traditional and Roth balances.
Your contributions to the Thrift Savings Plan must be made by payroll deduction; you cannot contribute a lump sum. So if Aunt Bertha dies and leaves you $50,000, you cannot send a $50,000 check to the TSP. So what could you do with that $50,000 windfall; here are some suggestions:
If you are not able to max out your TSP contributions, increase your contributions to the full amount and add Aunt Bertha’s money to your budget to plug the gap caused by your increased TSP contributions.
If you are already contributing the full amount, consider funding an IRA with Aunt Bertha’s money. As long as you have earned income you can contribute to an IRA (though you also must be under 70 ½ to contribute to a Traditional IRA). The 2016 IRA investment limits are $5,500 with an additional $1,000 catch up contribution for those 50 and over (including those who turn 50 during the year).
If you’re fully funding both the TSP and an IRA, good for you! You can add Aunt Bertha’s money to your emergency fund, or your children’s college fund, or pay down debt, or just plain spend