I’ve tried to write about this before, but I could never figure out the right way to say it to make the most sense possible: every year that you don’t put as much money as possible into a tax-advantaged retirement savings account, you are missing an opportunity.
In a conversation on Reddit today, this exact thing was explained by someone good with words. He explained that tax-advantaged saving for retirement should often be prioritized over other goals, because “ each year’s contribution limit is a one-time opportunity.”
This is dead on what I have been trying to say. Each year that you don’t contribute the maximum available, you’re giving up that opportunity for tax-advantaged savings. You can’t put in twice as much the next year. The window is gone once the tax year is over.
It hit me hard one day when I realized that my husband only had a few more years to contribute to his Thrift Savings Plan (TSP) TSP account. Even if we max out the contribution each year in the future, we’ll never be able to make up for all those years that we didn’t contribute as much as we could have. And he’s unlikely to ever deploy again, meaning no amazing bonus years in which you are allowed to contribute so much more.
You are allowed to contribute up to $17,500 (2014 numbers) into your TSP account each year. That means that if you are in the military for 10 years, you can contribute a total of $175,000 to your account in total. But what if you don’t bother the first few years, and then contribute a smaller amount for a few years? If you realize you are going to separate from the service in three years, there is no ways to suddenly stash a bunch of money in TSP. You still have the same limit each year*.
This is just another thing to think about when considering how to prioritize your spending, savings, and debt reduction. While debt reduction is important for several reasons, and there are legitimate reasons for spending, those opportunities don’t expire with each calendar year. Tax-advantaged retirement savings does expire each year, so be sure to plan your contributions accordingly.
Note: The asterisk* above is because there are two exceptions to the TSP contribution rules. Folks aged 50 and over have a catch-up contribution limit, which allows them to contribute a little more each year. The amount is $5,500 for 2014.
The other exception is tax-exempt combat pay. Contributions of tax-exempt combat pay are not limited to the regular $17,500 amount. Instead, you can contribute up to $52,000 when the amount in excess of the regular limit is coming from tax-exempt combat pay.