The Thrift Savings Plan (TSP) was designed to provide federal employees with a retirement savings option comparable to a private sector 401(k), featuring lower fees and a 5% matching contribution from their agency. However, many federal employees are not contributing enough each pay period to receive the full 5% match. Failing to take full advantage of this match can lead to substantial financial losses over time, making it essential to understand how the agency match operates.
1% Contributions Are Automatic
Each pay period, your agency or service will automatically add an amount equal to 1% of your basic pay to your TSP account, even if you don’t contribute anything yourself. These are known as non-elective contributions, and they are not deducted from your paycheck, nor do they impact your taxable income.
Employee Contributions
If you began or rejoined federal service on or after October 1, 2020, you were automatically enrolled in the TSP with a 5% contribution of your basic salary. This change was made to ensure that new employees take full advantage of the 5% agency match. (For individuals who started or rejoined federal service between August 1, 2010, and September 30, 2020, the automatic enrollment contribution was set at 3%).
Each pay period, your TSP contribution is deducted from your basic salary in the amount or percentage you elected when you first started contributing. This means that if you were hired before the dates above, you elected the contribution percentage. If you elected a TSP contribution of less than 5%, you’ve already forfeited a good amount of free money and the resulting compound interest.
Understanding Agency Matching Contributions
Your agency will match up to the first 5% of your pay that you contribute each pay period. The first 3% of your contributions are matched 100%, and the next 2% is matched at 50 cents on the dollar. When combined with the power of compound interest, the 5% agency match is essentially like receiving free money. It’s also worth noting that Roth TSP contributions qualify for the agency match as well, but the matching funds are deposited into your traditional TSP balance for tax purposes.
Optimizing Your TSP
It’s simple math. if you’re not utilizing the 5% agency match, you’re leaving money (and the resulting compound interest) on the table. To learn more about maximizing your TSP nest egg, connect with an FRC® trained advisor.
