tsp contributions
Making the Most of TSP Contributions by Paul Kalra
Thrift Savings Plan (TSP) Advice from Paul Kalra
Paul Kalra, CFP, ChFC, CLUIf you are a FERS (Federal Employees Retirement System) employee who contributes to the TSP (Thrift Savings Plan) each year, there are some important things to know when it comes to making your contributions. This is because maxing out your deposits too early in the year could actually put you at risk of losing some of your matching contributions.
Each year, the government can contribute up to 5% of your salary to the TSP plan in a number of different ways. These include:
- Agency automatic 1% contributions
- Dollar-for-dollar contributions (on the first 3% of pay that you contribute)
- 50 cents on the dollar (on the next 2% of pay that you contribute)
While it is a good strategy to obtain as much of the employer matching as possible, because there is an annual limit on TSP plan contributions, by “maxing out” your annual contributions too early in the year, employer matching contributions can be lost by not making any deposits after the plan has met its annual contribution limit.
Things to Consider
When it comes to making your annual TSP contributions, there are several important factors to consider. For example, you need to be aware of when you actually reach you annual contribution limit for the year. This is because when this limit has been reached, your employee contributions into the plan must be suspended for the rest of the year. In fact, the TSP system won’t even allow any contribution by an employee to be processed if it will cause the total amount of deposits for that year to exceed the annual limitation.
In addition, if you have reached your annual contribution limit prior to year-end – and further deposits have been suspended – this also means that agency matching contributions will also be suspended. This is because these contributions are based on the amount of contribution that an employee makes into the TSP in each pay period. Therefore, if you aren’t making any contributions, then there won’t be anything to match.
It is important to note, however, that if you are a FERS employee, your agency is still required to make an automatic 1% contribution – even if your employee contribution and agency matching contribution has been suspended.
More about Paul Kalra, CFP, ChFC, CLU:
Paul Kalra has been providing financial services for over 25 years to doctors, business owners and others nearing or in retirement. After a successful career with John Hancock Financial Services,in 2002, Mr. Kalra founded his own firm, Signature America Financial Planning Services, Inc. in Lake Forest, CA.
In his practice as a financial planner, Paul Kalra has found that when people are nearing their retirement years, they are faced with confounding decisions about their retirement plans, 401(k)’s, IRA’s, Social Security, Medicare, life insurance, wealth-preservation and estate planning. What motivated him to focus his practice on helping people in their 50’s and 60’s was when Mr. Kalra began facing such decisions himself and realized that the answers would have been very tough if he were not a financial planner.
Earn the maximum amount of money from TSP matching contributions
Are you one of those FERS employees that are compensated more than most? And do you also contribute the maximum amount of money to your TSP account every year? There is some good news for you. You can stop losing matching contributions of the government by maxing your TSP out before the year ends.
Earn money from TSP matching contributions:
The government is liable to contribute around 5 percent of your pay check to the TSP after every pay period. Here’s how:
- There is a 1 percent automatic contribution that’s paid even if you are not contributing to your TSP.
- A dollar-for-dollar match applicable on 3 percent of your income that you add after every pay cycle.
- The next 2 percent of your income that you add each pay period will also have a fifty-cent on a dollar match.
So, if you contribute a certain amount of money that’s substantial then you are bound to lose some serious amounts of money to government contributions. Here’s how you can prevent this from happening:
First what you need to do is divide your salary by the number of pay dates and not the pay periods in a year. Normally there are around 26 pay dates. There are some cases when there are 27 days as well but let’s just stick to a 26 day one for this example. If you earn 110 thousand dollars in a year, then you will have to part with 693 dollars after every pay period. This will ensure that you receive around 5 percent government contribution for each of your pay period.
This strategy is of course not applicable to those who don’t earn a lot of money but for those who get compensated a substantial amount, this is certainly something to know about.
