Sometimes no change can be good. Here is some good news for federal employees. On October 15th the Internal Revenue Service announced the elective deferral limit for defined contribution plans such as the Thrift Savings Plan.
Although there was some concern that the limit would decrease, that did not happen. (refer to the article Pay Attention to Your TSP Contribution Limits
) The elective deferral limit for 2010 will remain the same $16,500 that it was in 2009. In addition, the catch-up contribution limit will remain at $5,500.
Highly compensated FERS employees should avoid choosing a percentage contribution that would result in their reaching the annual deferral limit before the last pay period of the year.
Once a person reaches the annual deferral limit ($16,500 in 2010), they cannot contribute to the TSP for the remainder of the year. Once they stop contributing, Uncle stops contributing his matching contributions of 4% of salary. The agency automatic 1% contributions will continue whether or not an employee is making TSP contributions.
A way to avoid losing government matching contributions is to elect to contribute a flat dollar amount per pay period, rather than a percentage of salary.
If you have 26 paydays this year, you would divide $16,500 by 26 and the answer, roughly $635, is the amount that can be contributed per pay period so that the elective deferral limit won’t be hit until the last pay period, and no government matching contributions will be lost. If there were 27 paydays, the amount would be roughly $611.
What about those of us for whom the amounts of $611 or $635 per pay period are unrealistic? It is better to contribute a percentage of your salary rather than a flat dollar amount. By electing a percentage of our salary, the amount of our contributions will increase each time we have a pay increase.
Catch-up contributions can be made by those who are 50 years old or older. If you turn the age of 50 during the year, you may make catch-up contributions from the beginning of the year. Catch-up contribution elections do not carry over from year to year. You have to make a new election each year.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.