Are you a highly compensated FERS employee who contributes the maximum to the TSP each year? Don’t risk losing any of the government’s matching contributions by maxing out your TSP before the end of the year.
The government can contribute up to 5% of your salary to the TSP each pay period, as follows:
- 1% agency automatic contribution paid whether or not you are contributing to the TSP.
- A dollar-for-dollar match on the first 3% of your salary that you contribute each pay period.
- A fifty-cent on the dollar match for the next 2% of your salary that you contribute each pay period.
For any pay period where you are not contributing for any reason, you will get the 1% government contribution and that is all. Let’s look at a highly compensated FERS employee who is not paying attention and reaches the TSP maximum ($18,000 in 2016) before the year ends.
Sally has a salary of $110,000 per year and is contributing 17% of her salary to the TSP. $110,000 a year comes out to $4,230 per pay period. At a 17% contribution rate, she will reach the maximum TSP contribution two pay dates before the end of the year. For the final two pay periods of the year she will not be contributing to the TSP. For these two pay periods, the government will contribute only 1% of her salary. Sally will have missed out on 4% of $4,230 for two pay dates. She will have lost $338.40 in government matching funds. Don’t be like this Sally.
Now let’s say that Sally was paying attention.
At the beginning of the year, Sally divides her salary by the number of pay dates (not “pay periods”, but “pay dates”) in the year. Most years will have 26 pay dates, though there is an occasional year with 27 pay days. We are faced with 27 pay periods on occasion because if we multiply 26 pay periods by 14 days per pay period, the result is 364 days. Since there are 365 (366 in leap year) days in a year, about every 11 years or so, each pay system requires a 27th pay period to “catch up.” In 2015, some agencies that were served by DFAS had 27 pay dates in the year.
In a 26 pay day year, Sally will elect to have $693 taken from her pay each pay period. In a 27 pay period year, she will choose the amount of $667. This ensures she receives the 5% government contribution for every pay period.
You don’t have to worry about losing matching contributions if you are contributing the extra $6,000 per year allowed for employees who are 50 and over (including the year in which they turn 50), because there are no matching contributions associated with the TSP’s “catch-up contributions.”
What if you are not currently highly compensated?
The best TSP contribution strategy for you is to stick with a percentage of your salary. That way, when (if) your salary goes up, the amount you are contributing to the TSP goes up correspondingly.
Thanks to Dan Jamison, CPA for the examples above. Dan is an expert in federal retirement and his practice is devoted to helping federal employees and retirees in the area of divorce.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. Order your copy at shoplrp.com. Ask your human resources office to contact Federal Career Experts about pre-retirement training.