The ongoing Thrift Savings Plan open season through Dec. 31 is an opportunity for eligible employees to enroll for the first time and for current TSP participants to change the amount of their contributions. The thrift plan is a major component of retirement savings for employees in the Federal Employees Retirement System and, in my experience, a significant contributor to the retirement benefits of many Civil Service Retirement System annuitants. Since the opportunity to make these changes is currently limited to two open seasons per year, it might be wise to take a few minutes to consider the plan’s ground rules and how they may affect your contribution decisions.
Making an election
Use TSP Election Form TSP-1 — or TSP-U-1 if you are a member of the uniformed services — to start a TSP account or request a change in contribution levels, unless your agency or service requires you to use an automated system, such as Employee Express, PostalEASE or myPay. Your election will take effect no sooner than the first full pay period in December. File your form early to avoid problems.
FERS employees can elect to contribute up to 15 percent of basic pay each pay period, up to the IRS annual limit of $14,000 for 2005. CSRS employees and members of the uniformed services can contribute up to 10 percent of basic pay, up to the IRS limit. The dollar limit is scheduled to increase to $15,000 in 2006 and thereafter.
If you will be 50 or older during 2005 and you are already making the maximum in regular TSP contributions, you can make additional catch-up contributions of up to $4,000 in 2005. This amount will increase to $5,000 in 2006 and will be indexed for inflation after that. You can sign up for catch-up contributions at any time, but you must make a new election for each calendar year. Civilians use Form TSP-1-C, and military members use Form TSP-U-1-C. For some participants, catch-up contributions are an important opportunity to help make up for lost time and potentially improve their standard of living in retirement.
You may terminate your contributions to the thrift plan at any time by using form TSP-1 or TSP-U-1. FERS employees will continue to receive their agency’s automatic 1 percent contribution, even if they make no elective deferral contribution. If you are terminating your contribution, the election will take effect no later than the first full pay period after your agency personnel office receives your properly completed form. Anyone who stops contributing will have to wait until the second open season following the termination to begin contributing again.
Deciding how much to contribute
If and how much you contribute should be based upon your personal circumstances and plans. In the absence of sound reasoning to the contrary, I recommend every employee contribute the maximum amount allowed under the rules. The thrift plan offers a unique combination of tax advantages, security and investment options that make it one of the best retirement accumulation vehicles available anywhere. If you save the money now, you always have the option — although possibly under some penalty — of spending it later. Missing the opportunity to contribute is a loss that cannot be recovered.
Before deciding to forego contributing to the TSP, or contributing less than the maximum amount allowed, I suggest you conduct the following review:
- Understand your retirement income sources and needs. You should understand what retirement income you will be entitled to from various sources outside the thrift plan, such as pension, Social Security, IRA and other private sources like savings and inheritance. Match these against your likely need for income in retirement and don’t forget to factor in income and other taxes that will apply. The easiest way to do this is
to conduct your analysis as if you retired today and gauge your needs in the future against your needs today. It’s not uncommon, in my experience, for people today to expect to continue an equivalent lifestyle well into their retirement years. The biggest reduction in spending usually results from paying off a mortgage, but this is sometimes offset by additional travel or other expenses.
- Check your account balance. Your TSP balance is updated each business day. You may access your account balance and allocation information online at www.tsp.gov. Make sure you know where you stand before making any decisions.
- Consider the potential benefits. There is a simple income calculator available on the TSP Web site to help you estimate the number of monthly payments you can receive from your account if you withdraw a specific dollar amount each month or to estimate the amount you can receive each month if you withdraw monthly payments based on life expectancy.
You can also use the TSP’s online annuity calculator to get a feel for the monthly payment, guaranteed for life, you can expect from your TSP balance.
- Consider the risks. What are the risks associated with making the maximum contribution? The primary risk is usually that associated with the need for a withdrawal before retirement. In this event you have some choices. You can take a lump-sum withdrawal and pay the 10 percent penalty; you can take a loan and repay the balance with interest, currently 4.125 percent; or you can begin regular monthly withdrawals based on your life expectancy. You will have to pay income taxes on all of these options except the loan.
The second most likely risk, in my clients’ experience, has been the possibility — or in some cases, the certainty — that they will not be able to afford their current lifestyles if they contribute the maximum amount. The solution in this case is to consider making some changes in your lifestyle. Like it or not, research shows that for many of us, the inability to save at least 15 percent of our annual income will mean that we will either continue working past retirement age, will live on a substantially reduced income in retirement, or both.
- Take advantage of employer matching contributions. Agency matching contributions are a bonus you should be reluctant to forego. If you can’t make the maximum contribution allowed, you should, at the very least, contribute enough of your own dollars to fully realize your employer’s matching contributions.
Written by Mike Miles
For the Federal Times
Publication October 18, 2004