Edward A. Zurndorfer, Certified Financial Planner

With only a few days remaining in 2012, many employees are focusing on usual year end tasks, including preparing for the holidays and perhaps making some tax moves to save on 2012 income taxes.

Year end also is the best time for employees to decide how much they want to contribute to the Thrift Savings Plan (TSP) next year and which TSP account(s) they want to contribute to -- traditional and/or Roth. This column discusses these choices and why any changes should take effect on the first pay date in January 2013.

The IRS announced that the elective deferral limit for 2013 --- the most that an employer can deduct from an employee's salary and put into an employer-sponsored retirement plan such as a 401(k), 403(b) or the TSP ---  will increase from $17,000 (in effect during 2012) to $17,500. All traditional TSP contributions deducted from an employee's before-taxed salary, and all Roth TSP contributions deducted from an employee's after-taxed salary, are considered elective deferrals.

The combined total of an employee's tax-deferred traditional and Roth after-tax contributions excluding "catch-up" contributions cannot exceed the elective deferral limit of $17,500 during tax year 2013 - January 1 through December 31, 2013.

Elective deferrals do not include the Agency Automatic (1 percent of an employee's gross salary) or the Agency Matching Contributions (maximum 4 percent) that FERS-covered employees receive. This is due to the fact that these agency contributions are not considered part of an employee's pay. Traditional contributions from tax-exempt pay earned in a combat zone for member of the Uniformed Services are also not included as part of the elective deferral limit. "Catch-up" contributions -- maximum $5,500 during 2013 -- are also deducted from an employee's salary but are not included as part of the annual elective deferral limit. 

When the annual limit for elective deferrals is reached, an employee may no longer contribute to the TSP for the remainder of the calendar year. The TSP system will not allow any employee contribution to be processed that will cause the total amount of employee contributions for the year to exceed the annual limit - $17,500 during 2013. 

When a FERS employee reaches the elective deferral limit during the year, the employee's agency matching contributions are also suspended for the rest of the calendar year. Agency matching contributions are based on the amount of employee contributing that an employee makes each pay period. If there are no employee contributions in a pay period, then there cannot be any agency matching contributions.

A FERS employee's agency must continue to submit agency automatic (1 percent) even though employee contributions and agency matching contributions are suspended.

Since CSRS and CSRS Offset employees do not receive agency matching contributions, they need not be concerned when during the year they reach the elective deferral limit.

The elective deferral limit of $17,500 in effect during 2013 applies to the total contributions an employee makes to a civilian and a uniformed services TSP account. During the year, the TSP will apply the elective deferral limit to each amount separately and will not allow an employee to contribute an amount to either account that exceeds the limit. In January, the TSP will check to see whether an employee's combined contributions to both accounts exceeds the elective deferral limit and, if so, will then return any excess contributions, along with any earning attributable on those contributions.

The TSP will apply the same process to "catch-up" contributions made to both accounts that exceed the separate "catch-up" contribution limit.

The TSP provides on its Web site an "elective deferral limit" calculation that allows a FERS employee to make the maximum employee contribution and still receive the maximum agency matching contribution. The worksheet is reproduced here. FERS employees are encouraged to use this calculator as soon as possible in order to have the optimum amount withdrawn starting with their first paycheck in early January 2013. The worksheet is reproduced here:

Worksheet to Maximize the Amount of Agency Matching Contributions

Example. The example below applies to a FERS employee who is paid on a biweekly basis. The employee made an election that is effective Dec. 16, 2012; for is agency, the pay date for that pay period is Jan. 4, 2013, which is the first pay date in 2013. In this example, the employee's biweekly contribution should not exceed $674 each pay period. If the employee was paid monthly, the contribution could not exceed $1,458 per month to ensure maximum Agency Matching Contributions.

Your estimate. For Item 1, enter the IRC elective deferral limit for the year in which your new election will be effective.

For Item 2, log into My Account on the TSP website (http://www.tsp.gov) to find the total amount of your year-to-date elective deferrals. This is the total amount of your employee contributions minus any traditional contributions from tax-exempt pay.

For Item 4, count the number of pay dates remaining in the calendar year, beginning with the pay date following the end of the first full pay period after you make your election.

* Employees can confirm the number of salary periods with their agencies or services. ** In this example, the last contribution of the year will be decreased to $650 by the employee’s agency so that the employee will not exceed the elective deferral limit for the year.

Once an employee decides how much they want to contribute to the TSP each pay date, they will do so either by using their agency's electronic enrollment process or by filling out and submitting form TSP-1.

Another decision facing TSP participants for 2013 is which TSP account they want to contribute to during 2013, namely:

1. The traditional TSP using before taxed gross salary;
2. The Roth TSP using after-taxed salary; or
3. Combination of (1) and (2), subject to the elective deferral limit of $17,500. FERS employees should note that no matter which TSP account -- traditional or Roth -- they contribute to, all agency automatic and agency matching contributions will always go into an employee's traditional TSP account.

Among the factors that should be considered in determining which TSP account should be used are:    

1. The employee's current marginal tax bracket;
2. The number of years until an employee retires;
3. The number of years an employee will spend in retirement;
4. Their expected rate of return; and
5. The employee's estimated retirement marginal tax bracket.

The TSP has a "Contribution Comparison Calculator" on its website that provides a side-by-side comparison of traditional and Roth contributions. This will help an employee assess whether the Roth TSP might be right for the employee.

The calculator may be found at www.tsp.gov/planningtools/contributioncompanrison.shtml. Employees should note that the calculated results are based on the limited information presented. Employees are therefore encouraged to consult a qualified tax or financial advisor to further assess their individual situations.

Once an employee decides which TSP account(s) to contribute to each pay date, they will do so either by using their agency's electronic enrollment process or by filling out and submitting form TSP-1.

Posted:  12/19/2012

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD -- and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD.  Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.

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