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“I stumbled on your podcast and the information is GOLD – thank you! I am 45 and 15 years away from retirement. This year I will maximize my TSP (1/2 Roth and Traditional). Can I contribute to a spousal IRA within TSP. My spouse works part-time and is not able to contribute.” – Jackie
As a Federal employee, you have some amazing benefits under the Federal Employee Retirement System. One of those benefits is the Thrift Savings Plan (TSP).
The TSP is an Employer-sponsored retirement plan. Unlike some of your other retirement plan benefits like health insurance and survivor benefits which include your spouse, the TSP is only for Federal Employees. To participate in the TSP you must be an active federal employee.
Jackie cannot make a contribution to a TSP for her spouse from her income. If your spouse is also a federal employee, you can strategize your cash flow for them to maximize their contributions to the TSP from their income. If your spouse is not a federal employee, they cannot contribute to the TSP however they and you can make a spousal contribution to an Individual Retirement Arrangement (IRA) which we will discuss later.
Each year you are eligible to contribute the maximum allowed limit according to the Internal Revenue Code to the TSP. In the year 2021, the amount of your allowable contribution to the TSP was $19,500.
As a Federal Employee, the first 3% of pay that you contribute will be matched dollar-for-dollar. The next 2% will be matched at 50 cents on the dollar. The maximum matching contribution made by your employer is 5%. Any contributions that you make over 5% of your pay will not be matched by your employer. That does NOT mean you should not contribute more; we encourage most of our federal employee clients to contribute the maximum amount to their TSP each year in accordance with their financial plan.
Your Biweekly Contribution
Automatic 1% Contribution
Agency Matching Contribution
Your % + 5%
If you are not maximizing your TSP contributions, no matter where you are at in your career, talk with your financial advisor who specializes in federal employee benefits about the best strategies to implement to take advantage of this benefit.
Most Federal employees are vested with the TSP after 3 years of service. When you are vested, that means your employer’s contributions are yours to keep. If you leave federal employment before vesting, your employer’s contributions to your TSP will be forfeited. However, your contributions are always yours to leave, transfer or withdrawal.
As a federal employee who participates in the TSP, you have two options to choose from. You can contribute to the Traditional TSP or the ROTH TSP.
We want you to think of your TSP account as one account with two buckets inside of it:
Bucket 1: Traditional Tax Deferred Contributions
Bucket 2: ROTH Contributions
The monies that you put into the first bucket, your Traditional TSP, are tax-deferred. That means that the money you put into this bucket has not been taxed yet. When you withdraw money from this bucket, hopefully, later in life, you will be taxed. The Traditional TSP is a phenomenal way to decrease your tax burden today and defer it until later when you retire. One thing to keep in mind is that most people subscribe to the myth that their taxes will be lower in the future when they’re retired and no longer retired.
We build financial plans for a lot of federal employees and generally, our clients’ taxes are not as low in retirement as they assumed that they would be. This is because as a Federal Employee a lot of your benefits are taxable when you retire from federal service: your pension, social security, and distributions from your traditional TSP.
This does not mean that you should not contribute to the Traditional TSP. This means that you need to have a tax plan for the next 5+ years. You need to strategize today on how you will navigate taxes later so that you can work diligently to retain as much of your retirement savings as possible.
The monies that you put into the second TSP bucket, the ROTH, are taxed today at your current tax rate. However, providing that you meet the rules of eligibility, you can withdraw money in the future tax-free from this account.
In order to be eligible to withdraw money from the ROTH TSP tax-free, you must be older than age 59 ½ and have had the ROTH account open for greater than 5 years.
Keep in mind that your employer’s contributions, the match, are not allowed to be deposited into the ROTH bucket. All employer contributions to the TSP are made to the Traditional account.
When you think of an Individual Retirement Arrangement (IRA) keep in mind the first word, “Individual.” Think of this as a singular person’s heartbeat. Unlike an employer plan which has two parties involved: you and your employer, the individual is a singular person’s account.
As a legally married spouse, you can make a contribution to your spouse’s IRA if they do not have earned income to still contribute to a retirement account each year. You must be legally married and file a joint income tax return to contribute.
You can choose to contribute to a Traditional IRA or a ROTH IRA Spousal IRA. The amount that you are allowed to contribute to either a Traditional or a ROTH Spousal IRA are published each year by the Internal Revenue Code. In the year 2021, the amount was $6,000 for people under age 50. If you were over age 50, an additional $1,000 catch-up contribution was permissible.
You CANNOT make a contribution to each account for the maximum amount, such as:
Account Contribution Tax Year
Traditional IRA $6,000 2021
ROTH IRA $6,000 2021
However, you CAN make a combined contribution to two accounts as long as it does not exceed the annual limit as published in the Internal Revenue Code.
Account Contribution Tax Year
Traditional IRA $3,000 2021
ROTH IRA $3,000 2021
Just like with the TSP, contributions to a Traditional IRA allow you to receive a tax deduction today and when you withdraw the money in the future the money will be taxed. Contributions you make to a ROTH IRA will be taxed today, at your current tax rate, and providing you meet the rules
If you are maximizing your retirement contributions you should consider opening a brokerage account that allows you to invest with the intent of growth. You will not receive retirement tax savings treatment but you could potentially accumulate wealth by not allowing your discretionary monies to be consumed in the monthly budget.
Earnings in a traditional brokerage account would be taxed at capital gains rates.
If you have questions about your retirement from federal service – let us know!
Tune into our podcast for federal employees or, send us a question for the opportunity to be featured on FERS Federal Fact Check.
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Get the most out of your federal retirement benefits by taking advantage of the FERS resources created by Micah Shilanski, CFP®, and the team of independent financial advisors at Shilanski & Associates, Inc. Join the thousands of federal employees who trust us to guide them in their retirement planning journey because of our unique perspective of how your FERS benefits contribute to your comprehensive financial plan.