Federal workers who are 50 and older (and those who aspire to someday reach that it’s-not-as-bad-as-it-sounds age bracket), dodged a big bullet last week in the pending tax bill worked up by the Senate. Sen. Orrin Hatch (R-Utah) proposed, then withdrew language that would have eliminated the so-called catch-up contribution rule. It allows federal Thrift Savings Plan participants past age 50 to put in more money (this year up to $6,000) in addition to the $18,000 allowed to other TSP members.
Eliminating the additional catch-up contributions would have been a major financial blow (higher taxes) for current participants. It would also have meant much smaller TSP accounts when individuals do retire. Many private-sector firms have eliminated defined benefit retirement plans, forcing employees to finance their own retirement via Social Security and by contributing to company-sponsored 401(k) plans. The FERS program, which covers most working feds, provides a smaller annuity than the old CSRS program, which it replaced. That makes the TSP (and catch-up contributions for those 50 and over) all the more important as part of the total retirement package.
Financial writer Dawn Doebler illustrated the tax break, writing: “If you’re in the 35 percent tax bracket and contribute the full $18,000 amount to your 401(k) (TSP) plus another $6,000 in catch-up contributions, you may be able to reduce your federal income tax bill by a total of $8,400. The catch-up portion accounts for $2,100 of that tax savings. In this case, making a $6,000 catch-up contribution actually impacts your disposable income by just $3,900.”
For a while, it appeared that the Senate version of the “must pass” tax reform plan would eliminate the $6,000 per year tax-deferred contribution that workers can make to their 401(k) plans, including its government counterpart the TSP. Then apparently some elected officials (and their staff members) called for a reality check. The TSP is an important retirement component for many members of Congress and their staffs, who typically write most legislation. For the non-millionaires on Capitol Hill, eliminating the catch-up option would have meant higher taxes and less money to spend in retirement.
When the FERS program was set up to replace the old CSRS retirement system, the idea was to make feds — like most of their private-sector counterparts — contribute more to their retirement. In the case of government workers, that was by contributing more money to their TSP accounts. To make it even more attractive, Congress at the time agreed to the very generous 5 percent match from Uncle Sam to workers who kicked in at least 5 percent of their own salary. Experts who drafted the FERS program figured that it would provide anywhere from 33-to-50 cents of every dollar they would have to spend in retirement.
Although its civil service annuity is much smaller than the CSRS benefit, FERS employees took to the TSP big time. There are now more than 16,000 workers and retirees with $1 million-plus accounts. The vast majority did it by investing regularly — in the stock funds — and staying the course, even through the Great Recession when accounts tanked. They continued to buy stock funds when they were, in effect, on sale because of the recession’s impact on the stock market. Now that the catch-up feature for 50-plus investors is off the chopping block, many will continue to use it to substantially increase their retirement nest eggs.