Changing your TSP contribution election to add the Roth option can be a little tricky. If done wrong, this could cause a FERS participant to lose out on thousands of dollars.
The best way for me to explain this is to tell you a little story about a man named George (name has been changed for privacy purposes). After doing a complete retirement and tax analysis with George, it was very clear that he would be better off contributing to the Roth TSP versus traditional TSP. The very next day, he changed his contribution election on TSP – 1 to have his full contribution going to the Roth TSP. At least, he thought he had.
A few weeks later he emailed me because he was pretty upset that his paycheck was not enough to meet his living expenses. Changing your TSP contribution from traditional TSP to Roth TSP will reduce your net pay because your contribution is included in your taxable income each pay period.
I had done an estimate on what George’s tax would be, which was not going to cause his net paycheck a significant reduction. Once I looked at George’s leave and earning statement I saw that he was contributing a very large amount to TSP and Roth TSP. If he continued contributing so much to TSP, it would not only prevent him from paying his bills, but he would also miss out on the TSP match for several pay periods.
If you overfund TSP, they will automatically stop your deductions and you would miss out on your 5% match for the remainder of the year. At the time this occurred, there were 17 pay periods remaining for 2015. (The last pay period of the leave year is 1/9/15, but you have to meet your contribution limit during the calendar year). At the rate of George’s TSP deductions he would meet his annual contribution limit by the 8/8/15 pay period, giving up 10 pay periods of free money: over $4,000.
How he fixed it:
We calculated how much George could contribute to the Roth TSP for the remaining pay periods in order to reach the maximum $18,000 plus $6,000 of catch-up. There were 17 pay periods remaining for 2015 and George could contribute $10,455 for the remainder of the year. We divided the amount he could contribute by the 17 pay periods and came up with a bi-weekly Roth TSP contribution of $615.00. He also could contribute $4,488 of catch-up, which was $264.00 per pay period. He completed another TSP – 1 and also a TSP -1-C for his catch up contributions.
The reason that the mix-up happened in the first place was that George had not completed the TSP-1 and TSP-1-C correctly. He thought he had done everything right but the forms are a little confusing. When George completed the election forms to change his contribution to Roth TSP, he completed section II indicating that he was changing his contribution to Roth. (If you don’t write anything in the traditional box, it is zero, which is what he wanted. What he did not do was complete section 3 where you have to tell TSP to stop your current contributions to traditional TSP. This needed to be done on both the TSP-1 and TSP-1-C for his catchup contributions. The result of not doing this was basically just doubling his contribution.
Hopefully, by learning from George’s experience, you will not make the same mistake. Click here to look at the TSP-1 form, Section II.