The Foreign Service Journal, April 2006

“ A pril is the cruelest month,” T.S. Eliot famously observ- ed. He probably didn’t have the deadline for filing income taxes in mind when he penned those words, but many of us still identify particularly strongly with the senti- ment at this time of year. Fortunately, there are some ways to use your Thrift Savings Plan con- tributions to ease the pain of tax sea- son and maximize your gains. 1. Sign up for the TSP! According to the Profit Sharing/401k Council of America (www.psca.org ), about 17 percent of all Americans eli- gible for enrollment in 401(k) plans such as the TSP don’t participate. If you are among that short-sighted minority, it is never too late to sign up; unlike health plans, there is no “open season” for enrolling to take advan- tage of the three key requirements of wealth accumulation: sufficient time for money to compound, enough money doing the compounding, and a sufficient level of earnings on those dollars over time. Of those three fac- tors, time is the most important by a wide margin. 2. Maximize your contribu- tions. Wisely, most federal employ- ees do put in at least enough to get the government’s 5-percent match. However, many do not contribute the maximum allowable $15,000 a year, even when they can afford to do so. This is true even though TSP contri- butions are “out of sight, out of mind” and the money is seldommissed. Not only do such employees pass up the chance to lower their yearly income tax burden, but they also forfeit the gains they could have realized by investing those funds. Some TSP participants rationalize the choice to invest less than the max- imum by opening Roth Individual Retirement Accounts and other IRAs. However, those programs fre- quently lack the TSP’s automatic con- tribution mechanism, so they require much more discipline to make install- ment payments. In addition, because Roth IRAs permit withdrawals with no further taxes or penalties (unlike TSP contributions), it can be very tempting to use those invested dollars to pay for vacations, a new car, etc. instead of letting them accrue savings for retirement. To put it bluntly, maximum contri- butions are imperative for workers in the Federal Employees Retirement System unless they are independent- ly wealthy or have a significant sec- ond source of income. When the fed- eral government instituted FERS more than 20 years ago, it signaled that it was following corporate America in changing retirement sys- tems from defined benefit systems (such as the old Civil Service Retirement System) to defined con- tribution systems (such as FERS). The distinction meant that FERS employees have to depend far more heavily upon their TSP investments than their CSRS colleagues. By the way, even though CSRS employees do not receive any govern- ment matching funds for their TSP contributions, they, too, are advised to contribute the maximum to their Thrift Savings Plan. 3. Make use of the catch-up provision. Under the Catch-Up Contributions for All Act, the ceiling on TSP contributions by federal employees aged 50 or older has been steadily rising since 2002, when it was just $1,000 higher than the maximum younger workers could contribute. Effective this year, the supplemental limit has reached $5,000, meaning that TSP participants who are at least 50 years old are eligible to contribute a total of $20,000 annually to their TSP. (You just need to submit Form TSP-1-C.) 4. Understand your TSP with- drawal options. It’s always impor- tant to know your options, but it obvi- ously becomes even more critical when you retire and have to make a choice of how to collect your accu- mulated funds. For instance, few employees pick the Designated Payment or Lifetime Annuity options, either because of preconceived ideas about the value of doing so or simply because they don’t understand the ramifications. Yet both options are worthy of consideration in many (though not all) circumstances where 18 F O R E I G N S E R V I C E J O U R N A L / A P R I L 2 0 0 6 Make the Most of Your Thrift Savings Plan B Y S TEVEN A LAN H ONLEY FS K NOW -H OW There is no substitute for making the maximum allowable contribution to your TSP each year.