A Simple Change to Your TSP Contributions Could Save You Money

If you are not careful in making your regular TSP investments, you could be making a mistake that will cost you a significant amount of money. Highly compensated federal employees should consider making a flat payment to the TSP each pay period. This column explains why this is could be important to you.

Highly compensated federal employees under the FERS system should be careful when adjusting their Thrift Savings Plan (TSP) contributions each year. These federal employees should avoid choosing a percentage contribution that would result in reaching the annual deferral limit before the last pay period of the year.

Once a person reaches the annual deferral limit ($15,500 in 2008 and $16,500 in 2009), he or she cannot contribute to the TSP for the remainder of the year. Once a person stops contributing, Uncle  Sam stops contributing his 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. Let’s say that the 2009 elective deferral amount is $16,500 and there are 26 paydays in the year. Divide $16,500 by 26 and the answer, about $634, is the amount that can be contributed per pay period so that the elective deferral limit will not be hit until the last pay period, and no government matching contributions will be lost.

I am aware that thus far this article is only relevant for those who have salaries about twice the size of the average federal salary. What about those of us for whom the amounts of $634 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

Individuals 50 and over (or who turn 50 in 2009) may also make an additional $5,500 in catch-up contributions.  This is up from $5,000 in 2008.  The timing of catch-up contributions does not affect the government matching contributions.
Adding the $16,500 to $5,500 gives federal employees the possibility of setting aside $22,000 in pre-tax dollars in 2009.  If only we all had the wherewithal to do so.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at johnfgrobe@comcast.net to discuss schedules and costs.

About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.