TSP

John Grobe

We’re getting closer to 2019 and that year will bring some changes to the Thrift Savings Plan. Some of these changes we know will happen and some we can guess at.

First we will look at those we know will happen. The Thrift Board will implement the TSP Modernization Act. They say it will be done by September, and Congress gave them until November. This will make withdrawing from the TSP much more flexible and will result in fewer separated employees moving their money out of the TSP to more flexible custodians. I, for one, am surprised that the financial industry did not vigorously oppose passage of the Modernization Act, as it will certainly cost them some fees. Maybe there is honor among thieves after all.

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We know that in mid-to-late October the Internal Revenue Service will announce the new elective deferral limit, catch-up contribution amount and several other numbers. This year’s elective deferral amount of $18,500 is $500 greater than the 2017 amount. With roughly 3% inflation expected for the period at which the IRS looks, it’s up in the air as to whether the amount will remain at $18,500 or increase to $19,000. The catch-up amount hasn’t increased for several years and is still at $6,000 in 2018. It’s not out of the realm of possibility that it will jump up to $6,500 in 2019. IRA phase-out amounts are likely to increase by one or two thousand dollars.

Now to some of the items that might happen. Congress might mess with (aka reduce) the rate of return on the G Fund. Congress, especially the House, has proposed lowering the statutorily guaranteed rate of the G Fund several times over the last couple of sessions of Congress. I suspect that the results of the mid-term elections will have a lot to do with whether or not this change comes to pass.

Though “Rothification” of retirement accounts did not make it through “tax-reform”, it might happen in the future. Rothification would take away the ability to set aside pre-tax dollars for retirement. The original Tax Cuts and Jobs Act called for reducing the amount of retirement contribution that could be sheltered from taxes to $2,500; all additional contributions would be taxed as in a Roth situation. Though Congresspeople disavow the idea of Rothification as part of what they call “tax cuts 2.0”, a line from Hamlet pops into my mind: “The lady doth protest too much, methinks.” If Congress were to make contributions to retirement accounts taxable, what would keep a future Congress from turning around and making all withdrawals, including Roth withdrawals fully taxable? Call me suspicious, but, after all Congress invites suspicion.

All of these changes, known or unknown, will be reported on here in the TSP Investment Report as they happen, so sign up to receive it by email.