As a new federal employee or armed forces member, you’re automatically enrolled in the Thrift Savings Plan (TSP). This means that 5% of your paycheck is deducted, and you start receiving the total government contribution of 1% and the 4% matching contributions from day one. In other words, the moment you start your job, 10% of your basic pay is invested in one of the TSP Lifecycle Funds.
The specific L Fund chosen for you depends on your age and career stage, with longer-term funds for younger hires and shorter-term funds for those joining the government later in their careers. This automatic enrollment process is designed to ensure your financial future is secure.
If you recently joined the federal workforce or the military, you may want to consider electing the Roth option for your TSP contributions. The Lifecycle Fund selected for your age can remain the same.
The key distinction between a Roth and a traditional TSP lies in timing your tax benefits. With a traditional TSP, your contributions are tax deductible for the current year, but you’ll pay taxes on all future withdrawals in retirement.
On the other hand, with a Roth TSP, your contributions are not tax deductible, but you’ll enjoy tax-free withdrawals in retirement. Understanding this difference can help you make a more informed decision about your TSP contributions.
Let’s assume someone is single, just graduated from college, and is entering the workforce. His projected salary is $60,000.
If the person used a federal income tax calculator and took the standard deduction, $5,460 would be needed to pay taxes. The person’s effective tax rate would be 11.8%.
Let’s consider a scenario where someone starts work in July. In this case, the salary should be halved to determine taxes, as the person is working only 6 of the 12 months. This adjustment results in a salary of $30,000. As a result, the tax bill is $1,718, and the effective tax bracket is now 10.6%. Understanding these tax implications can help you make informed decisions about your TSP contributions.
A person allocating $1,500 or 5% of his or her income to enable obtaining the total matching contributions from the traditional TSP would change his or her tax bill to $1,538.
The person would save $180 in taxes for the traditional TSP election.
But what if, as a new hire, the person elected a Roth TSP investment instead of the traditional choice? What if the $1,500 after 35 years of compound returns at an annual rate of 5% using the Investor.gov Compound Interest Calculator will be worth $8,272.04? Would you trade $180 today to receive the future $8.272.04 tax-free?
Whether the person elected the Roth or traditional choice, the 1% agency/service contribution and the 4% matching contributions would be directed as additional traditional savings in the TSP. So, if you wanted all future contributions configured as Roth contributions, you would still have the agency/service 1% contribution and the matching contributions in a traditional account.
For new employees interested in changing from the traditional to the Roth option for their future TSP election, go to How to Change Your TSP Investments.
None of us know what our effective tax rate will be decades from now in retirement. Here they are for 2024:
For tax year 2024, the top tax rate remains 37% for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly).
The other rates are:
- 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
- 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
- 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
- 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
- 12% for incomes over $11,600 ($23,200 for married couples filing jointly)
The lowest rate is 10% for single individuals with incomes of $11,600 or less ($23,200 for married couples filing jointly).
