The Sequestration will affect virtually every government employee, including civil service employees, DoD civilians, and military members. While military pay will remain unaffected, many of their non-monetary benefits may be cut. Unfortunately, DoD civilians and other civil service employees may be subject to furloughs of up to 20% of their hours each pay period.
According to AF.mil, “Civilians may be furloughed without pay for up to 22 discontinuous (or 30 continuous) days spread over a maximum number of pay periods possible with no more than 16 hours furloughed in pay period. The covered pay periods are from April to September 2013.”
This is a tough pill for many to swallow, as it makes financial planning difficult and will stretch many budgets. One aspect many people don’t think about after the initial shock wears off is how the sequestration will affect Thrift Savings Plan contributions. The good news is that none of the rules around the TSP are changing – the government isn’t taking away agency matching or preventing participants from making contributions. TSP Contribution limits remain unchanged. However, because agency matching is based on earnings, many TSP participants will see decreased retirement contributions this year. Let’s take a look at how the sequestration will impact Thrift Savings Plan Contributions.
Sequestration Impact on Military TSP Contributions
Based on recent information from TSP.gov, there should be no direct impact on TSP contributions for military members at this time, because military base pay in unaffected. Military members will still be able to make their normal contributions, including the contributions of special pay, bonus pay, and other allowable benefits.
Sequestration Impact on Civil Service TSP Contributions
Civil service members and DoD civilians will see the most changes with their TSP accounts. While there are no direct rule changes to how the TSP is administered, the impact of working fewer hours and receiving reduced pay will decrease the total agency contributions members see. Let’s take a look at how Agency contributions work, and how the sequestration will impact retirement contributions. Here is the TSP agency matching chart, courtesy of TSP.gov:
As you can see from the chart above, the government automatically contributes 1% of your base pay, regardless of whether you make any contributions. FERS Employees then receive a 100% match for the first 3% of their pay they contribute, then 0.5% for the next 2% of their contributions from their base pay. Nothing on the above chart is changing. However, because your pay is decreased, the total amount of your contributions will be decreased.
For example, Let’s say you earn $2,000 every two week pay period and you contribute a total of 10%, or $200, to your TSP. If you are furloughed for 2 days per pay period, your pay would be reduced to $1,600, and your total contributions would be $160 if you kept things as-is.
If you make TSP contributions based on a flat dollar amount, and not a percentage of pay, then your contributions will remain unchanged. Keep this in mind, as it may impact your budget since you will be contributing the same dollar amount, but receiving less pay.
Should You Reduce TSP Contributions?
Hopefully the sequestration will be short lived, but right now, it’s too early to tell. My recommendation is to sit down and run some numbers to see how this will impact your budget. If you can afford to keep things in the current state for a few pay periods, you may be able to weather the storm. If things are already tight, then you may need to cut your contributions.
Keep in mind that reducing your TSP contributions may impact your agency match. As mentioned earlier, the formula for agency matching contributions remains unchanged, so if you reduce your contributions, the agency matching contributions may be affected.
Should You Stop TSP Contributions
At this time, I wouldn’t recommend stopping your contributions unless absolutely necessary. Even keeping things at 1% of your pay will help you grow your retirement nest egg, and will still get you additional contributions from the federal government. However, you will need to let your budget be your guide.
Taking a TSP loan is an option if necessary, but keep in mind there are several downsides of taking a TSP loan, including the need to immediately pay the loan back in full if you lose your job. If you believe you may be laid off, a TSP loan is one of the worst things you can do. My recommendation is to learn more about TSP loans before determining if this is an option for you.
TSP Financial Hardship Withdrawals
TSP hardship withdrawals are an option if you absolutely need access to your cash, but I recommend looking everywhere else for additional cash before going down this route. There are several reasons, but mostly because it will end up costing your more money in the long run. Here is how a TSP hardship withdrawal will affect your TSP plan:
- Your withdrawal is limited to the amount of your hardship – in other words, you must document the hardship and how much money you will need. This is also limited to a one time withdrawal. Since the sequestration will last for an undetermined time frame, you should hold off as long as possible before making this decision.
- You will pay an immediate 10% early withdrawal penalty and any income tax associated with the withdrawal, further reducing the amount that you withdraw.
- You will not be able to make TSP contributions for 6 months following your hardship withdrawal.
Here is more information on the downsides of TSP hardship withdrawals.
Images courtesy of TSP.gov.