The Thrift Savings Plan (TSP) recently announced it will begin automatic TSP contributions for new employees. Federal employees who are part of the Federal Employees’ Retirement System (FERS) and were hired after July 31, 2010 will be automatically enrolled in the TSP with an automatic contribution of 3% of their basic pay, which will be automatically deducted from the employee’s pay each period and deposited into the Thrift Savings Plan. This is in addition to the Agency Automatic Contributions of 1% of total base pay and will make employees eligible for Agency Matching Contributions.
Employees have the option of opting out of automatic plan participation by simply opting out when they are hired. In addition, TSP members can start, stop, or change contributions at any time by using their agency’s or service’s electronic system, or by filling out form TSP-1 (civilian TSP) or TSP-U-1 (uniformed services).
Civilian employees under FERS also have the opportunity to earn make additional Thrift Savings Plan contributions from their base pay to receive Agency Matching Contributions. Civilian TSP members who contribute at least at least 5% of their basic pay to their TSP account can receive the full amount of agency matching contributions.
Benefits of automatic Thrift Savings Plan contributions
Many employers in both the public and private sector have discovered many people believe that retirement plans are a great idea, but the employees often don’t take the time to sign up for the benefits. Companies that offer an automatic enrollment have seen a surge in plan participation, as most people opt to leave the contributions in place. In most cases, this is a great idea because automatic contributions make it easy to start saving money.
If you have the opportunity to start investing in a the TSP or a similar plan such as the 401k, then go for it. You would be surprised at how easily you can adapt to the slightly lower paychecks. Since the contributions are made before taxes, your paycheck actually decreases by a lower amount than you are contributing. For example, if you are contributing $100 per month, you might only see a difference of $65 in your paycheck because federal and state taxes haven’t been withheld from your contributions. Your TSP contributions will then grow without the drag of taxes holding them back until you make withdrawals in retirement age. Overall, this is a simple way to save money for retirement.
Other Thrift Savings Plan changes
The Thrift Savings Plan recently announced plans to add the TSP Roth 401k option, which is similar to a Roth 401k plan commonly found in many public sector jobs. The benefits are similar to a Roth IRA when it comes to how the contributions and withdrawals are taxed (contributions have already been taxed, and withdrawals are made tax free). The difference however, is that Roth IRA eligibility is based on income, and Roth IRA contribution limits are lower for IRAs that the 401k or TSP plans. The Thrift Savings Plan Roth 401k option will be a great investment opportunity for both civilian and military members alike.
Comments
This still has not happened for members of the military yet. The law was changed to allow the uniformed services to begin automatic enrollment in TSP, but the law left it up to the branch secretaries to impliment it. And, they have been very slow to make changes.
I think it would be a good idea, especially if they started it at a low percentage of income, somewhere in the 1-3% range would be perfect. The vast majority of military members I served with didn’t take advantage of the Thrift Savings Plan (or any investments for that matter!).
Want to put together a pool for when they get the Roth TSP option up and running? My guess is sometime in 2013.
On an unrelated note, anyone heard anything about if they are ever going to create the military Flexible Spending Accounts called for in last year’s defense budget? That thing would save our family several hundred dollars each year as our eyeglass bills are quite large.
They are saying the Roth 401K for Thrift Savings Plan (TSP) will go into effect in 2011…
As for a Flexible Spending Account, I haven’t heard any final word. It seems to me like the biggest hindrance would be creating the system to set it up and track it. I wouldn’t count on that happening quickly once it is decided upon.
This is a very good change. We are failing to save even a small fraction of what is needed for retirement. This is a good way to increase the savings for retirement a bit.
I agree, John. Many companies in the private sector are doing the same thing, and some are even adding escalators of 1% of salary per year for the first few years. Making it automatic is a great way to encourage savings. And studies are showing it is working well. Hopefully the employees who are already in place will take it upon themselves to begin or increase their savings as well!