The Thrift Savings Plan, or TSP, is the defined contribution retirement plan offered to U.S. civil service employees and retirees, as well as members of the uniformed services. With nearly five million participants, the TSP is one of the most popular retirement programs in America. Here's how much you can contribute to your TSP account in 2017, and some advice on how much you should contribute.

TSP contribution limits for 2017

The short answer is that the 2017 TSP elective deferral limit is $18,000. This amount applies to all of your TSP traditional and Roth contributions. An additional catch-up contribution of $6,000 is allowed for participants age 50 or older. These limits refer to money you choose to have withheld from your paycheck and deposited into your TSP.

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The overall contribution limit to a TSP, also known as the annual addition limit, is $54,000 for the 2017 tax year. This includes your elective deferrals as I mentioned above, as well as agency automatic contributions and employer matching contributions. This limit does not include the catch-up allowance, if applicable, so the maximum addition to your TSP in 2017 is $60,000.

Because of the TSP matching structure, the overall limit is rarely, if ever, reached. As of this writing, the FERS "agency automatic contribution" rate is 1% of salary per year, and the matching contributions rate is dollar-for-dollar up to 3% of salary and 50 cents on the dollar beyond that percentage, up to 5% of salary altogether. Regardless of salary, catch-up contributions are not matched.

This translates to a maximum matching contribution rate of 4% of salary, and since the highest matching rate is 100% of contributions, even the most highly paid government employees who are over 50 could theoretically contribute $24,000 through elective deferrals, receive an $18,000 match, and get a 1% automatic contribution. Since the first two figures add up to $42,000, we'd be talking about a pretty big salary for the agency automatic contribution to produce a total that's anywhere close to the limit.

There's a special rule for members of the uniformed services serving in a combat zone that could potentially push their contributions toward the limit. Tax-exempt pay earned in a combat zone does not count toward the elective deferral limit if contributed to a TSP, but it does count toward the overall limit.

How much should you contribute?

These are the limits. It may not be practical, or even necessary, for you to contribute anywhere near the TSP limits to create the retirement of your dreams. After all, if a total of $5,000 per year is contributed to your TSP throughout a 30-year career, it could balloon into a $472,000 nest egg, assuming a historically conservative 7% annualized growth rate. This would be in addition to your FERS pension and your Social Security income you'll eventually get.

While you probably don't need to completely max out your TSP contributions, you might be surprised at how big of a difference a small increase can make.

Let's look at an example. We'll say that you're 30 years old and earn $45,000 per year. If you contribute 5% of your salary to the TSP, including matching contributions and the 1% agency automatic contribution, this means that a total contribution of $4,500 is being made this year. Assuming 7% annualized returns and 2% annual raises, your 30-year account value would be about $522,000.

This is certainly a nice amount of money, and would put you in better shape than most American retirees. However, consider the effect of raising your contribution rate by a small amount:

  • By contributing 6% of your salary, your 30-year nest egg could be $574,000.
  • With a 7% contribution rate, your account could swell to more than $626,000.
  • Finally, if you're an aggressive saver, a 10% savings rate could build a $783,000 TSP balance.

The point is that when it comes to retirement savings, it's far better to over-prepare than under-prepare. Your Social Security and FERS pension may not be quite enough to provide your dream retirement by themselves. Your TSP is an excellent tool to ensure that you have sufficient income for the retirement you want, so take advantage.