Might our contribution limits to the Thrift Savings Plan (TSP) go down? It is possible.
Although the Internal Revenue Service has never reduced contribution limits in the past, we haven’t seen a year quite like the last one since 401(k) plans were introduced. Even though the TSP is technically not a 401(k), it shares the same contribution limits.
In 2009, the elective deferral amount (what we can contribute) is $16,500 and the catch-up contribution limit (for those 50 and over) is $5,500.
There is a real possibility that these amounts can be reduced to $16,000 and $5,000 for 2010. The IRS will not decide on next year’s limits until October, but with negative inflation being a reality, a reduction is not out of the question. This is unusual to those of us who have grown used to having all adjustments be upward movements.
Despite the fact that deflation cannot reduce CSRS/FERS and Social Security annuities, it can affect the amount that can be contributed to defined contribution plans. The Social Security trustees have speculated that deflation might cause Social Security benefits to not receive a COLA for 2010 and maybe even 2011. As CSRS and FERS COLAs are determined by the same inflation index, the same might occur for federal retirees.
Highly compensated FERS retirees may have to adjust their contributions in order not to lose the government match for the last couple of pay periods of the year. (See A Simple Change to Your TSP Contributions Could Save You Money)
Stay tuned. The IRS and Social Security will announce the new numbers in October.
