When it comes to the amount that you contribute to your Thrift Savings Plan account, there are two issues: the federal government’s TSP contribution limits, and how much you feel you can contribute. Both are important parts of the equation, and understanding them both will help you to make an overall plan for contributions during your time in the service.
TSP Contribution Limits
Federal law limits contributions to tax-deferred savings accounts like TSP. For 2018, the regular contribution limit is $18,500. This limit is for taxable income, including base pay, incentive pay, special pay, and bonus pay. This limit is called the “elective deferral limit.”
There are special rules for non-taxable income, such as income earned while in a tax-exempt combat zone. For 2018, you can have contribution total of $55,000 if everything in excess of the elective deferral limit comes from taxable income. This limit is called the “annual addition limit” or I.R.C. Section 415(c) limit. There are some tricky bits of the tax code as it applies to contributions that entire in to the “annual addition limit,” and using traditional and Roth IRA contribution
If you are aged 50 years or older, or will turn 50 during the 2018 calendar year, you can also make additional “catch-up” contributions of $6,000. This additional $6,000 is on top of both the elective deferral limit and the annual additional limit. This is called the “catch-up contribution limit.”
How Much Should I Contribute?
The short answer is: as much as you can. However, different situations require different strategies. In figuring your total contributions, I want you to look way beyond your current situation and look into the future. How much money would you like to have saved by the time you separate from the service? I think this is one aspect of TSP planning that is very different from any other retirement planning. Unlike Individual Retirement Arrangement (IRA) planning, you can’t count on decades of contributions. You can only contribute to your TSP account while you are serving, or if you move to a government position. For most of us, that means 4 or 8 or 20 years of contributions, not 30 or 40. That makes a big difference.
Even if you think you know how long you will remain in the service, there is always the possibility that an injury, a draw-down, or some other surprise could cut your military service short. This is why I really encourage members to save as much as they can manage from the very beginning of your career.
Once you are looking at the big picture, you can make smart decisions about timing your contributions to take advantage of tax-free pay and other issues. No matter how you cut it, more is always better.
How Do I Organize This?
One important thing to remember about TSP contributions is that you can change them regularly and easily via MyPay. That is why I encourage people to aim high when planning their TSP deductions – you can always lower them if you just can’t possibly manage with the amount you planned. You can make changes as frequently as you want, always considering the contribution limits listed above.
Contributions to Roth and Traditional TSP accounts are designated differently. Contributions are designed as a percentage of base pay, incentive pay, special pay and bonus pay. Contributions to TSP accounts can be managed and changed via your MyPay account. Be sure to click all the way through the pages to ensure that your changes are recorded properly, and maybe check back in a few weeks to be verify that the changes “stuck.”
Contributing is always good, contributing more is always better, and making thoughtful decisions that look at the big picture is the best. Consider carefully how many years you might have to contribute, the likelihood that your timeline will be cut short, and how you can maximize any potential tax-free contributions and increased contribution limits for tax-free amounts. Most of all, just save!
This post is part of a series. See the other parts for more information:
Day Three: How Much Should I Contribute?
Day Four: TSP Funds: One Is Right For You
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