2013 TSP Contribution Limits

November 25, 2012 | Kate Horrell

Planning ahead?  You know I am always planning ahead, at least when it comes to finances.  (Don’t look in my laundry room.)  The 2013 Thrift Savings Plan (TSP) contribution limits have been announced, and it has gotten me thinking about how much money we can really afford to put into TSP.  As my husband gets closer to retirement, I’ve realized that we have a limited number of years to continue contributing to TSP, and we’d better start putting in more if I want to reach some magic high number before he retires.

The maximum contribution limits for the calendar year 2013 are $17,500 for regular situations.  If you are aged 50 or over, you may make catch-up contributions of an extra $5,500, for a total maximum contribution of $23,000.  If you are deployed to a tax-exempt combat zone, you may make total contributions of $51,000 for calendar year 2013, but anything over your regular limit must be made while in a tax-exempt combat zone.

If you are trying to max out your contributions, there is some semi-simple math to figure out how much to contribute each month.  First, take the $17,500 and divide by 12 months, which means you would want to contribute $1,458.33 every month.  Wow, that’s a lot.  You can’t direct specific dollar amounts for TSP contributions, but rather percentages of base pay, special pays, and bonuses.  Therefore, you need to calculate what percentage of your pay will equal that dollar amount.  The formula is simple:

 

p = base pay

t = dollar amount of TSP contribution

x= percentage needed to be deducted

the calculation is     t/p = x

In this equation, let’s imagine that you want to put $500 per month into your TSP and your base pay is $3539, as an  E6 with over 16 years of service, using 2012 pay figures.  Into your head or your calculator, input 500/3539, for a result of 14.12%.  You have to contribute whole percentages, so you would want to contribute 14% of your base pay in order to get $500 per month.

If you are also contributing special pays or bonuses, you’ll have to do some additional math to make sure you get the contribution that you want.  Be sure not to go over the limit for your situation – that opens up a whole different set of problems.

TSP contribution directions can be changed via the MyPay system.

The most important thing about contributing to TSP is to start, and then to continue increasing your contribution whenever you get a yearly increase, a promotion, or an increase due to time in service.  I’ve yet to hear anyone complain that they saved too much for retirement.

Comments

  1. Jason06 says:

    Just FYI: For the new ROTH TSP (which most military members should be contributing to vs the traditional), you must enter a dollar amount and not a percentage. I am glad the TSP offers this for the ROTH, it is a much easier way of setting up your savings.

  2. makessensetome says:

    I thought that a Roth TSP should only be contributed to once the traditional tsp contribution was maxed out? I would love to see an article that kind of explains this a little more.

    • MajorDad says:

      Nope. The combined total (Roth and Traditional) contributed can't exceed the $17,500 limit. The combination depends on where you are timewise.
      For younger members it makes more sense to max out on the Roth. For older folks like me, it makes more sense to take the tax break now.

  3. Sarah says:

    I am confused as to how switching to the ROTH makes sense. Don't we want to let the amount we already contributed to the traditional grow and compound instead of open a new account?

    • guest says:

      Sarah, it is all about taxes and if you want to pay them now, or when you retire. If you are in a deployment zone a Roth, and an IRA to Roth conversion makes 100% sense since pay is tax free. Essentially you are putting money (that's not being taxed due to deployment) into an account where it can grow and at retirement be withdrawn…tax free.

      A conversion in a deployment zone, or if you are in a low enough tax bracket that you aren't paying taxes also makes sense since you again are allowing money to grow and you can use it without ever paying taxes for it.

      Another added benefit is that in a case of economic hardship you can withdraw your contributions (not any gains) without paying a penalty or taxes.

      With the state of the economy currently it makes more sense to contribute to a Roth since it's a pretty good bet that taxes will be going up in future years…the contribution ensures you pay taxes now, at a lower rate, then you might pay at retirement.

      • Sarah says:

        I understand all that. I guess the question I can't seem to get an answer to is what happens to the money sitting in the traditional TSP if we stop contributing to it and start contributing to roth only? He is deploying this year and wants deployment (tax free) to go into the roth, but what happens to the money he already put away into traditional?

        • Sarah says:

          does it mean we just have two balances??

          • guest says:

            Yup, If he logs into My Pay he can change his allocations.

            Tthe money that's in your existing TSP stays there and grows. All new money, special pays etc can be directed to the Roth option he will have to indicate a dollar amount to direct into the account each month. If he's deployed don't forget about the Savings Deposit Program since it's guaranteed 10% annual interest during the deployment and up to 90 days afterwards

          • sarah says:

            I guess it feels like starting all over and letting the first account go to waste if we just drop it now.

          • KateKashman says:

            Absolutely not, Sarah. He will just have two accounts, with one total balance. It's just as if you have two accounts at the bank, maybe a checking account and a savings account. It doesn't mean that you have any less or any more money. I will try to get up a long post about this soon. Unfortunately, we've had a rough week here and I am behind in everything.

          • Sarah says:

            BUT it does mean that you will earn less compounded interest and earnings because you started a new account and stopped contributing to the first. Same with two accounts at the bank. You earn more on a $5,000 savings than two accounts of $2,500 each.

          • guest says:

            You aren't letting it go to waste at all, and you won't be starting over :-) and it's the perfect time to start a so-called active savers mentality. There was recently a Harvard study that found only 15% of the population according to their research, actively thinks about, and saves for, their retirement and future. Those so call active savers typically were wealthier and better financially prepared then the passive savers.

            If you can shift your mentality on money and saving now, think about how well off you can be in the future :-).

            In our house we play it as a quarterly game, every three months we "guess" the cumulative balance of our 401ks, TSP and IRA's based off of how the stock market has behaved and the amount of our base contributions, then we check the accounts and whomever is closest gets to do what they want for the night (when my husband wins it means a weekend of me playing video games with him lol). We've found that it forces us to question our contributions (as in are they high enough) and it's turned saving for an event 20 or more years in the future into something fun, we've raised our contribution percentage 5% in the last year alone. We also wrote up a dream list of things we want to do in retirement, mainly places to visit, along with their cost to go (adjusted for 20 yr inflation). Every time we save enough money to go to one we cross it off the list. Now, do we realize we can't just save enough money to go to these places, yea, but it gives us the sense of accomplishment we need to sacrifice current "stuff" for future experiences.

  4. guest says:

    Sarah, you would earn the same amount of interest on one account at 5000 as you would on 2 accounts of 2500 assuming all factors like compounding frequency are the same in the accounts.

    Lets say you earned 10% interest in one year. 5000 x .1= 500: 2500 x .1=250 if you have 2 of those 2500 accounts 250 + 250 is still 500, it's just in two different pots.

    Now, if that was in the regular pre tax TSP, when you pulled it out, that $5500 would be taxable, so if you are in the 25% bracket, that 5500 is only worth 4125, a loss of $1375.

    If that 5500 was put in the Roth TSP, you theoretically would have already paid taxes on the 5k contribution, and the 500 gain is tax free but since he is in a tax free zone, you will never be paying taxes on the contribution or withdrawal so you are essentially giving yourself $1375 MORE dollars down the road.

    At the same time the money he already has in his standard TSP isn't going anywhere, it will continue to gain over the long term, you just aren't adding additional cash contributions to it.

  5. rob says:

    what date should I change to meet maximum amount for 2013

    • KateKashman says:

      Great question, Rob. You can change it at any time. However, if you are trying to make equal contributions across the year, I would suggest that you make the change now.

      One thing, though: My husband just made his change on MyPay, and the confirmation page said that it would be effective 1 January 2013. I *think* that means that it will take effect with the pay that starts on 1 January 2013, and be reflected in your 15 January 2013 pay. However, there is the slim possibility that I am misunderstanding and it actually means that you will see it in your 1 January 2013 pay, which will actually be deposited on 31 December 2012. I don't think so, but if having a smaller paycheck on 31 December 2012 would be a financial hardship, you might want to wait until mid-month to make the change.

  6. guest says:

    I do have one question, do you know if there are any plans in the pipeline that would allow a servicemember to allocate special pays or incentive pays to the Roth IRA as they can for the original TSP? I would LOVE to be able to allocate the tax free special pays to the Roth.

    • sarah says:

      I read on the mypay website you have to physically go to your finance office to process that.

    • KateKashman says:

      I haven't seen that option yet, but we are new to the Roth game. Maybe you can do it at your finance office, as Sarah says below? Otherwise, I think you'd just have to manually make the adjustments as he moves in and out of tax-free zones. I think the disadvantage of using percentages is that you could, in a perfect world, unintentionally go over the contribution limits. Of course, with the higher contribution limits in tax-free areas, that would be pretty impressive and I might actually be willing to take that chance :)

  7. sarah says:

    I appreciate the help! I have my own 401k at work and its almost easier to not have options! Now we need to figure out what amount to contribute. If we put in the dollar amount we have been does it end up being less due to taxes or do they take out the taxes from a highrer amount so the contribution ends up being the amount we want to contribute? Does that question make sense?

  8. Sarah says:

    For example, he has been in five years and is e6. Right now 4% of pay is ending up contributing around $87 a month. The plan was every year in January and at his anniversary increase by 1% (more when cars and student loans are paid off). So 5% of basic pay starting January 1st is $141. Does he put in more to reach that $141 after taxes? Or will $141 actually be put in if that is the amount he elects?

  9. guest says:

    No problem Kate, I don't want to take over your comments section but I remember how horrifically confused I was when I first started getting into finances and saving etc.

    From what I've seen on ours it looks like if you say you want $100 dollars in the account they process all your paycheck deductions/taxes then move the dollar amount of $100 into the Roth so a larger amount will come out of his check, taxes in addition to your contribution amount.

    If he is deployed and tax free then 100 would come out of the check and go into the Roth. If he is deployed, and you are able to, max out the Roth account if you can (17,500 is the max for 2013). It is an incredible investment opportunity, especially considering that tax rates will more than likely go up in future years.

  10. sarah says:

    I wish! We are not in a place of being able to max out yet! Getting there…thanks for the help.

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