Note: A newer version of this article is available at How to Get the Most Money From Your TSP Matching Contributions
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 by 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 ($17,000 in 2012) before the year ends.
Sally is a grade 13, step 10 in San Francisco. She is under age 50 and not eligible for TSP “catch-up” contributions. Her annual salary is $125,926. She can afford to contribute 15% of her salary to the TSP. If she selects a contribution rate of 15%, she will reach the maximum TSP contribution before the final pay period 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. She will have lost almost $200 in government matching funds.
Now let’s say that Sally was paying attention.
At the beginning of the year, Sally divides her salary by the number of pay days (not “pay periods”, but “pay days”) in the year. Most years will have 26 pay days, though there is an occasional year with 27 pay days. In a 26 pay day year, Sally will elect to have $654 taken from her pay each pay period. In a 27 pay period year, she will choose the amount of $630. This ensures she receives the 5% government contribution for every pay period.
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.