Return to the "POINTER VIEW"
                         January 25, 2002

New TSP rules could cost unwary investors

The combination of higher salaries and higher percentage-of-salary investment limits in the Thrift Savings Plan this year might reduce -- for unwary investors -- the government’s matching contributions.

Employees in the Federal Employees Retirement System can now invest up to 12 percent of their biweekly pay in the TSP. That’s up 1 percentage point from last year as part of an ongoing phaseout of the percentage limits. Employees under the Civil Service Retirement System may now invest up to 7 percent of pay biweekly.

Regardless of the percentage limits, though, participants may invest no more than a tax-code maximum called the "elective deferral limit" -- which is $11,000 this year.

When the percentage-of-salary investment limits were lower, the dollar cap was a concern only for the highest-paid FERS employees. But by investing at 12 percent, a FERS employee earning more than $91,666 would hit the dollar cap this year.

The potential trap for FERS investors is that when the dollar limit is reached, employee contributions are cut off, and so are government matching contributions.

"You only receive agency matching contributions on the first 5 percent of your basic pay that you contribute each pay period," TSP officials said. "If you reach the annual limit before the end of the year, your contributions (and agency matching contributions) will stop."

When the employee and matching contributions are shut off, however, the employee remains entitled to continue receiving an automatic agency contribution of 1 percent of salary. (Under the rules Congress set for FERS employees, the government automatically invests an amount equal to 1 percent of salary regardless of whether they invest their own money. FERS investors also get matching contributions of up to an additional 4 percent of salary if they contribute their own money.)

Only employee contributions count against the dollar cap. Government contributions don’t count against it, nor do amounts that investors transfer into the TSP from similar programs of prior employers.

In the current open season, which ends Jan. 31, investors can adjust the amount of their contributions, which can be made by dollar or percentage amounts. Employees who miss the current opportunity will have another chance during an open season that starts May 15.

CSRS employees don’t have to worry about this new ripple in the investment game. CSRS employees don’t get employer contributions toward their TSP accounts.

The TSP Web site (www.tsp.gov) has a fact sheet, "Annual Limit on Elective Deferrals," that provides more information, including how t