By Kurt Mears & Daniel Amiot, Advance Capital Management Financial Advisers
As an employee of a government institution, you are eligible to participate in the Thrift Savings Plan (TSP), which is the government’s unique retirement plan. Similar to a private corporation’s 401(k) plan, the TSP allows you to set dollars aside and invest them for future use in retirement.
While most funds in your TSP will be money you contribute, the government does provide some financial benefits as cash directly into your account. There are two different ways this is done: a non-elective contribution and a matching contribution.
Let’s dive into the details of each.
TSP non-elective contributions
The non-elective contribution is so named as you have nothing to elect. You will automatically receive this from the government into your TSP account with every paycheck. Currently, the amount is 1% of your pay. Even if you do not wish to otherwise participate in the TSP, you will continue to get this contribution.
TSP matching funds
If you wish to contribute some of your earnings into the TSP, your government employer provides additional money into the plan based on the amount you contribute. The amount they contribute generally uses the following schedule:
- Employer matches the first 3% of basic pay deferred to the TSP, dollar-for-dollar
- Employer matches 50% of the next 2% of basic pay contributed ($0.50 on the dollar)
This match maxes out at a total of 4% of your basic pay, as long as you contribute 5% or more. As these matching dollars are in addition to the nonelective 1% contribution, this will provide a total maximum benefit of 5% of your pay.
There are a few additional details to remember about the government match:
- While your contributions and matching dollars are always fully yours (fully vested), the 1% automatic contribution vests after three years of employment (two years in some circumstances).
- This money is always pre-tax and you will pay income taxes when you take this money out.
- Your contributions count whether you use Roth, traditional pre-tax, or both types.
- Lastly, the government does not match on assets rolled into the plan from other employers.
Take advantage of TSP matching funds
Given all the above, the best choice for your financial future is probably to maximize the money the government provides to you by contributing at least 5% of your paycheck. Fortunately, most new employees will not need to take any action. Every employee hired after October 1, 2020 is automatically enrolled in the plan contributing 5% of their pay as pre-tax dollars. You will need to take action, however, if you wish any of the 5% to be classified as Roth or to be invested in something other than the L-fund designed for your age.
As always, please reach out to us if you have any questions or would like advice on your investments, how much to contribute, or to get a better picture of what retirement looks like for you.
Also, you can learn more about federal retirement benefits by downloading our free, easy-to-understand guidebook, FERS Made Simple: Understanding and Maximizing Your Benefit.
Kurt Mears is a Chartered Retirement Planning Counselor who provides federal workers with comprehensive wealth management solutions, such as retirement planning and investment advice, to help them achieve their financial goals. Contact him for a free, no obligation financial consultation.
Daniel Amiot is a CERTIFIED FINANCIAL PLANNER who helps federal employees navigate the complexities of the FERS, TSP, and other government benefits. Contact him for a free, no obligation financial consultation.
