There are a number of key elements that Thrift Savings Plan (TSP) participants may want to consider as they enter the new year. Below is a list of points that just might impact federal employees’ TSP accounts in a profound way if executed properly and consistently.
TSP Annual Contribution Limit Has Changed for 2022
The maximum annual contribution amount to the TSP is increasing in 2022. It will be a total of $20,500 ($20,500/26 = $788 per pay period). This amount was previously $19,500 in 2021.
TSP Catch Up Contribution Remains Unchanged
Federal employees who are age 50 and older can still contribute an additional $6,500 per year to the TSP. The year you turn age 50, you can contribute more each pay period ($6,500/26 = $250 per pay period). This must be reselected each year as the contribution limit increases.
Age 50 or Older Max Funding & Catch Up Contributions Can Be Entered on One Line Election
The maximum total of TSP contributions will appear as $1,038 per pay period. This is the absolute most you can put into your TSP in 2022.
TSP Roth Funding Considerations
Roth contributions inside the TSP start building retirement savings that are tax free and have tax free growth. You may want to consider beginning them gradually so as to absorb and pay some of the income taxes now. Consider a percentage of total TSP contributions, e.g. 2% of your 5% total TSP contributions, to gradually absorb the added tax burden. Your increased income could affect student grants and other issues, so be aware, but most have found it positively impactful.
Contribution Allocations in a Falling Market
If the stock market goes down, and you are buying the C, S and I Funds bi-weekly per pay period, you are buying at a discount.
As the stock market recovers or rises, you are taking advantage of dollar cost averaging. You buy at all price points and mitigate the overall impact of the stock market’s volatility on your TSP, potentially increasing gains over time.
You are buying at a discount when the stock market falls, so a falling market may be to your advantage. This principle applies to Contribution Allocation only as this is the amount bought every pay period and not your balance.
If you are nearing retirement, especially within 3-4 years of retirement, consider whether your TSP will be used for income. If so, then formulate a plan for income, which may have to include the G Fund inside the TSP.
If the stock market was to lose value, what is your recovery plan? Taking income monthly from an asset that could lose money could be a dangerous sequence of withdrawal risk. If the asset shrinks, and you take income, it goes even lower than the impact the market downturn initially had. Be aware of this danger, and form a plan.
Withdrawing from the TSP is pro rata, meaning an equal portion will be withdrawn from each fund. You are not allowed to withdraw solely from the G Fund, but instead must do so proportionately across all funds which could present a danger. There may be some fine options to consider outside of the TSP when replacing the G Fund for income.
Avoid Knee Jerk Emotional Reactions
When the stock market does go down, as it inevitably will, you must avoid selling low and moving to the G Fund for 100% of your balance. Most TSP investors (and investors alike) cannot time the market. They typically sell low and buy high.
Instead, formulate a plan assessing the amount of risk you can take and the amount of income you need and stick to it. If there is a market downturn, what is your recovery plan?