Based on my experience, which is admittedly biased by the type of work I do, feds are generally very interested in contributing to the Thrift Savings Plan. In fact, in more than 20 years of working with hundreds of federal employees, I think I can count the number who are eligible to contribute but do not on one hand.
This is not surprising given how much encouragement you receive from your employer. I doubt that many private sector employers put as much effort into promoting participation in the retirement savings plan that they sponsor, in the cases where they offer a plan.
And why shouldn’t the TSP encourage you to participate? Contributing to the TSP is good for the TSP, since it helps to reduce costs that the plan must pass through to each participant — making it a better plan for all participants.
Contributing to the TSP is often good for you, as an employee, as well. FERS-covered participants receive matching contributions for up to the first 5 percent of pay they contribute each year. Additionally, money in the TSP is harder to access before retirement, so it’s more likely to be there later, when it’s needed. TSP participants have access to the G Fund, which is a unique investment opportunity that pays an extraordinary rate of interest for the amount of risk it produces. Your TSP allows you to invest at very low cost, makes it easy to effectively and efficiently diversify your account, and provides the potential for tax savings through tax deferral.
But, in spite of all of these great reasons to contribute to the TSP, it’s not always the best choice. There are certain situations where it is OK — even smart — to suspend the deferral of your pay into the TSP. Broadly, you should not contribute funds to the TSP that you expect, or are reasonably likely to need before you retire, or during the coming two years — whichever is longer. Instead, you should save money to a taxable savings or money market account until you have accumulated enough to meet your expected withdrawal needs, with room to spare. By room to spare, I mean you should probably have accumulated an emergency cash reserve, in addition to what you know you’ll need, before you direct money into the TSP.
That said, if you are covered by FERS and are capable of deferring more than 5 percent of your pay into the TSP, you might want to defer only 5 percent to obtain the match and then save the excess, after taxes, to your cash reserve savings until they grow large enough to cover your need.
Mike Miles is a Certified Financial Planner licensee and Principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email questions to email@example.com.