Strategies for Growing Your TSP

View this article online at https://www.fedsmith.com/2019/07/21/strategies-growing-tsp/ and visit FedSmith.com to sign up for free news updates
By on July 21, 2019 in Retirement with 0 Comments
Green plant growing out of the top of a stack of gold coins embedded in a pile of soil depicting growing wealth over time for building retirement savings

What often separates the success stories from the tragic failures in financial planning is, as the term implies, sound planning. This may seem obvious, but many federal employees fail to start thinking about retirement until it is just around the corner.

Earlier is better, but whatever your age, career stage, or retirement goals, the time to start planning is always now. The earlier you start saving, the sooner you can begin growing your Thrift Savings Plan (TSP) and other retirement accounts. These tax-advantaged accounts have yearly contribution limits, which means the sooner you start saving, the more assets you can shelter and the longer your assets may be able to grow. 

In addition to growing your TSP, you need to think about how you will use this money later in life.

Tax Brackets

Let’s examine what we commonly see as the tax bracket system in America today. These numbers are for 2019 as it relates to tax brackets, specifically taxable income.

For many federal employees, we find they hover around the top of the 22% tax bracket or higher, maybe $140,000 married or $80,000 single.

When you look at those robust pensions and take into account Social Security, spousal earnings, and other sources of retirement income, your taxable income in federal retirement may drop all the way down to about the bottom of the 22% tax bracket. Instead of dropping to the 12% range, you may simply drop to the other end of the same tax bracket.

Line graph in a stair step display showing progression of tax brackets for single and married filing jointly in a federal career

This is a unique problem to have here in America because not many people have a pension.

A lot of advice that you may listen to on the radio or read about discusses tax deferral. Maybe you have heard someone say, “Save your money in the TSP and pay taxes after you retire because your tax rate will be lower!”

If you examine the numbers carefully, many of you may find that your tax rate will not be lower. Thus you could be pulling out at the same rate that you are putting in.

Is that good or bad? What if taxes go up? If taxes go up in the future, would you rather pay taxes now or in the future when they’re higher? No one knows the future of our tax code but it is an interesting thought to ponder. 

Let’s examine two case studies for growing your TSP. The hypothetical figures below are for illustrative purposes only.

CASE STUDY 1:

Consider Joe, a federal employee, who continues to only contribute to the traditional TSP, (10% of his pay while receiving the 5% match from TSP.)

Assumptions:

  • Salary in 2019: $75,000
  • Pay Increases: 2%
  • Rate of Return: 4%
  • Federal Tax Rate: 22%
  • 2019 Beginning Traditional TSP Balance: $150,000

If we assume a retirement year in the future, (i.e., 2028) then his TSP at the 4% growth rate and 10% contribution rate will be worth roughly $371,928.

However, because the money is in a tax-deferred state, that $371,928 is not all Joe’s federal retirement savings. It is Joe’s and the federal government’s money.

When we take out the 22% that the government might get, Joe’s spendable money ends up being $290,104. Be careful when you look at your TSP and say, “I have X number of dollars.” If it’s tax-deferred, your TSP savings is not all yours.

YearTraditional TSP
2019$167,475
2020$185,878
2021$205,252
2022$225,639
2023$247,086
2024$269,638
2025$293,347
2026$318,262
2027$344,437
2028$371,928
Total after tax:$290,104

Question — What portion of that money will go to the government, and who gets to make that decision?
Answer — The government determines what our tax rates are, which is then used to calculate the amount we owe in taxes.

CASE STUDY 2:

Joe stops contributing to Traditional TSP, and begins contributing 7.8% of his pay to Roth TSP with the 5% match going to the Traditional account.

Assumptions: (same as above)

  • Salary in 2019: $75,000
  • Pay Increases: 2%
  • Rate of Return: 4%
  • Federal Tax Rate: 22%
  • 2019 Beginning Traditional TSP Balance: $150,000
  • 2019 Beginning Roth TSP Balance: $0.00
YearTraditional TSPRoth TSP
2019$159,825$5,967
2020$170,119$12,292
2021$180,903$18,991
2022$192,199$26,083
2023$204,027$33,585
2024$216,411$41,517
2025$229,375$49,897
2026$242,944$58,748
2027$257,143$68,086
2028$272,000$77,943
Total after tax$290,104

Tax planning strategies may help as you’re chartering the course to your federal retirement days. Analysts at Retirement Benefits Institute are happy to assist you with any federal benefit questions.

© 2019 Brandon Christy. All rights reserved. This article may not be reproduced without express written consent from Brandon Christy.

Tags:

About the Author

Brandon Christy, CPA, PFS, is the founder and president of Retirement Benefits Institute, Inc. He is an established leader in contracted federal retirement benefits education, and his company has trained over 10,000 federal employees to help them gain clarity and confidence in retirement.

Top