Sample Benefit Analysis

Thrift Savings Plan
Similar to a 401(k) plan, the TSP permits you to make pre-tax contributions every time
you get paid. You decide how much to allocate to your TSP, up to a certain limit. The
TSP allocation is taken out of your gross pay, and your paycheck is reduced by that
amount. The allocated amount goes directly into your TSP account, which you can
invest in various funds. In 2007, FERS and CSRS employees could contribute up to
$15,500 of their basic pay to the TSP.
On November 27, 2002 a program of “catch-up” contributions was authorized for TSP
participants age 50 and over who are already contributing the maximum they can to
the TSP without exceeding the IRS limit.
There are two tax benefits to investing in the TSP. First, your TSP contributions are
taken out of your pay before taxes are computed. Second, taxes on contributions and
attributable earnings are deferred until you withdraw your money.
The before-tax benefits of investing in the TSP are considerable. With before-tax
contributions, the money you contribute is taken out of your pay before federal and, in
almost all cases, state income taxes are calculated. Thus, the amount used to calculate
your taxes is smaller and you pay less in taxes now. By paying less current income tax,
you have more take-home pay than if you had put aside an equal amount in savings
after taxes were deducted. Your TSP contributions are excluded from the taxable
income reported on the Form W-2, Wage and Tax Statement, that you receive from
your agency each year. Thus, you do not report them on your annual federal tax
return. This special tax treatment does not affect your salary of record for other federal
benefits - such as the FERS Basic Annuity, the CSRS annuity, or life insurance - nor
does it affect Social Security or Medicare taxes or benefits.
To give you an idea of the advantage of saving through before-tax contributions to the
TSP, let us suppose that you are a CSRS participant earning basic pay of $30,000 a
year. Let us also assume you are in the 15 percent tax bracket. If you contribute 5
percent each pay period (or $1,500 per year) to your TSP account, you will owe $225
less (15% x $1,500) federal tax in the current year than if you had not contributed to
the TSP, but rather saved the $1,500 after paying taxes that apply to it. This is
because when you save through the TSP, your contributions are not included in the
amount on which your tax is calculated. The difference in your tax bill will be even
greater if the state in which you live permits tax-deferred savings, as most states do.
By contributing to the TSP, you benefit from tax-deferred contributions and earnings in
your TSP account because you defer (that is, postpone) paying federal taxes on the
money you contribute until you withdraw the funds from your TSP account. In addition,
over the years, the money in your account will accrue earnings. These earnings are
also tax-deferred. This means that you do not pay income taxes on your TSP account
contributions and earnings until you receive the money - usually after you retire, when
your tax bracket may be lower.
Deferring the payment of taxes means that more money stays in your account,
working for you. The longer your money is invested, the greater the benefit of taxdeferred
earnings. Whether you can also defer state or local income taxes depends on
the jurisdiction in which you live.
Another significant advantage for FERS (but not CSRS) employees is that they are
Public Sector Retirement Educators - Betty Boettcher - 800-587-7476 Page 42 of 56