Though similar to 401(k) retirement savings plans in the private sector, the Thrift Savings Plan (TSP) offers a better value in two important ways: the lowest fees in the financial industry and a generous agency (employer) match of up to 5%.
FRTIB Increased The Automatic TSP Enrollment In 2020
Prior to 2020, research showed federal employees were not contributing enough each pay period to qualify for their 5% agency match. This trend caused so much concern that the Federal Retirement Thrift Investment Board (FRTIB) increased the automatic TSP enrollment for newly-hired FERS workers from 3% to 5% on October 1, 2020.
If you were hired before this date, your automatic TSP contributions will remain at the same percentage as it was before this action went into effect. However, it should get you thinking about raising your TSP contribution to 5%.
“Add in the magic of compound interest and you can see why the 5% agency match is considered free money.”
It’s Simple Math: The 5% Agency Match Is Free Money
Let’s recap — for FERS employees, your agency matches up to 5% of your TSP contribution each pay period. The first 3% is matched dollar-for-dollar. The next 2% is matched at 50 cents on the dollar. This is in addition to the automatic 1% of your pay that your agency contributes to your TSP even if you don’t contribute at all. Add in the magic of compound interest and you can see why the 5% agency match is considered free money.
The TSP Agency Match & IRS Contribution Limits
The annual limit for regular TSP contributions is established every year by the Internal Revenue Service (IRS). For example, the limit for 2022 is $20,500. You need to make sure you don’t hit the TSP contribution limit before the end of the year otherwise you’ll lose your 5% agency match for each pay period that follows.
Agency Matches Go Into Your Traditional TSP Balance
When the agency makes a matching contribution on your behalf, these contributions are deposited into your traditional TSP balance even if you also have a Roth TSP balance. Why? Because all agency matches, and the interest they earn, are considered tax-deferred along with the your traditional TSP contributions.
Why The 5% TSP Agency Match Is So Important
If you’re still not convinced, consider this: with inflation hitting an all time high this year, the fear of running out of money in retirement can be a sad reality for many. The free money you get with the 5% TSP agency match helps build the savings you’ll need over a 30-year retirement.
