Fortunate Feds
There’s no way around this – if you’re amongst the roughly 13% of federal employees not contributing at least 5% of your salary into your Thrift Savings Plan (TSP), you’re making a costly mistake. Fortunately, anyone hired or rehired after October 2020 is automatically enrolled in the TSP with a 5% contribution rate.
Realize how lucky federal employees are. According to a February 2023 report from the Bureau of Labor Statistics, only 69% of private industry employees have access to an employer-provided retirement plan. Of the companies that offer a 401(k), 41% provide employer matching contributions up to 6%. The median private industry employer match is around 3%.
Federal employees get a healthy 5% match from Uncle Sam. This is the breakdown of that 5%: there’s a 1% agency automatic contribution regardless of whether you contribute, plus a dollar-for-dollar match on 3% of what you contribute, plus the next 2% you contribute is matched at $0.50 per each $1.
How Much Could 2% Really Matter?
Let’s say you decide that you can only afford a 3% TSP contribution. You’re only 2% shy of the magic 5%. So, you’ll get a 1% automatic agency contribution, plus a 3% dollar-for-dollar match on the 3% you contributed, for a total of 4%.
Does it really matter if you put in 3% vs 5%? Let’s take a look.
Hypothetical: You’re currently 25 years old and plan to work a full 30-year career where you get at least a 5% employer match (not necessarily with the federal government the entire time). You plan to retire at a youthful 55. Your current salary is $90,000, and you expect to get a 1% salary increase each year (note: the average federal pay raise from 1969-2024 was 3.68%). We’ll say over that 30 years, your investments earn an annualized return of 8%.
Scenario A: You contribute 3% and get a 4% match. Ending Balance $817,908
Scenario B: You contribute 5% and get a 5% match. Ending Balance $1,168,459
Saying,“It’s just 2%” is the same as saying, “It’s just $350,551.” In Scenario B, you end up with over $1.1 million. Your personal contributions over 30 years were only $156,532…let that sink in. The other $1,011,927 came from Uncle Sam’s contributions & compound growth.
Limits and Taxes
Matching contributions do not count towards the $23,000 you can contribute. Remember, if you’re 50 or older, you get to throw in an additional $7,500.
You are not taxed on the matching pre-tax contributions. The matching contributions grow tax-deferred and will be taxed as ordinary income upon distribution, the same tax treatment as your traditional TSP and traditional IRA.
Roth Matching
To clear up a lot of rumors, you 100%, without a doubt, get the employer match if you choose to have your contributions go into your Roth TSP. Again, these matching contributions are not applied against the $23,000 employees contribute.
Up until the passage of the SECURE Act 2.0 in December 2022, employer matching contributions had to go into your traditional (pre-tax) TSP, even if your contributions went into your Roth (post-tax) TSP. SECURE 2.0 Section 604 gives employers the option to allow matching contributions to go into the Roth tax bucket.
Remember with the Roth TSP bucket, your money grows tax-free, and qualified distributions are tax-free when you reach age 59 1/2. This may be a long-term tax planning opportunity to discuss with a financial professional.
A few additional items to note if the Federal Retirement Thrift Investment Board (FRTIB) eventually allows matching contributions to go into your Roth TSP:
- It’s an option, not a requirement.
- If you have matching contributions that go into the Roth tax bucket, this money will count as income and will be taxable to you via a 1099-R.
- The Roth matching contributions will not be subject to the 7.65% payroll tax.
For more information on these provisions, see IRS Revenue Bulletin 2024-2.
Vesting – When is the Money Yours?
Being vested means that you own and keep the contributions and earnings, even if you leave the employer. Most employers have some sort of incentivized vesting period for matching contributions. If you only work for that employer for a short time, you may lose a portion or all of the money they contributed when you leave.
For the 1% agency automatic contribution, most federal civilian employees have to stay at least 3 years to be fully vested and keep that 1% match. Congressional and other non-career employees have a 2-year vesting period. If an employee dies in service, the 1% is vested regardless of how long they were employed.
What about the other 4% match plus what you contributed? Good news! You’re always vested in your own contributions, the earnings on your contributions, and the agency matching contributions and earnings.
Don’t Front Load
You only get the agency match (dollar-for-dollar on the first 3% and then 50% of the next 2%) when you’re contributing. You’ll still get the 1% even if you don’t contribute, but you obviously want to take full advantage of the full 5%.
I’m a huge supporter of “time in the market”, and a Vanguard study proved that getting your money invested as soon as possible (known as “lump sum investing”) is an optimal strategy, but not at the expense of free government matching.
Let’s say you gross $90K annually. Dividing that by 26 pay periods gives you roughly $3,461.54 per check. We know that the government will match 4%, or $138.46 per pay period, as long as you’re contributing at least 5%. Why are we using 4% and not 5%? Because you’re going to get the 1% agency automatic contribution either way.
What happens if you’re feeling flush with extra cash? Let’s say you’re serving at a high-threat designated Embassy receiving danger pay, post differential, and Separate Maintenance Allowance. You decide to contribute $1,800 per paycheck and hit the maximum employee contribution limit of $23,000 in 13 pay periods. If you do this, the government stops matching after pay period 13, so you only get $900 (1% automatic) plus $1,800 (4% match for 13 pay periods) from the government.
If instead, you spread out your contributions throughout the entire year, the 4% government matching contributions would have been $3,600, plus the $900 1% agency automatic, for a total of $4,500 in government contributions alone.
In this scenario, front-loading your contributions cost you $1,800, plus all of the growth that would have come from that $1,800. To drive home the point, missing that $1,800 for just one year, at an 8% annualized growth rate over 20 years would mean you retire with $8,390 less.
More Than Money
The match is about more than money, it’s about time.
Again, let’s say that you make $90K annually, earning roughly $1,730.77 gross per week, or $3,461.54 per pay period. To keep it simple we’ll assume you never get a pay raise (highly unlikely) from age 25-55.
Each year, the government will give you an extra 2.6 weeks of pay. Here’s the math. You get a 5% match worth $173.08. Multiply this by 26 pay periods, and you get a total annual match worth $4,500.08. Take this $4,500.08 divided by your weekly pay of $1,730.77 and that equals 2.6 weeks. That’s 104 hours, that you don’t have to be away from your family.
If you get a 5% match worth $4,500 for an entire 30-year working career, even with no salary increases, the match alone when compounded at an 8% annualized return gives you $513,173. That’s 5.7 years of gross pay in retirement. 5.7 years of income for doing what? Simply contributing 5% to your future self. Not a bad deal.
Tyler Weerden is a financial planner and the owner of Layered Financial. In addition to being a financial planner, Tyler is a full-time federal agent with 14 years of law enforcement experience. He holds a Bachelor of Science degree, a Master of Science degree, the Series 65 license, and is a Certified Fraud Examiner (CFE).