I made a small adjustment to my paycheck today and decided to max out my TSP (Thrift Savings Plan, basically the 401(k) for federal employees).
The contribution limit is $18,000 in 2016 for those 49 and under. Those 50 and older can put away an additional $6,000.
I get paid biweekly (26 times a year), so it comes out to about $692/paycheck. Here’s what it takes to max out your 401(k) assuming you are 49 and under:
- monthly: $18,000/12 = $1,500
- semi-monthly: $18,000/24 = $750
- biweekly: $18,000/26 = $692
- weekly: $18,000/52 = $346
Here’s what it would take if you are 50 and older:
- monthly: $24,000/12 = $2,000
- semi-monthly: $24,000/24 = $1,000
- biweekly: $24,000/26 = $923
- weekly: $24,000/52 = $461
Here’s why I decided to do it.
- I’ll pay less in taxes. We just filed our taxes a couple weeks ago, and it always pains me to see how much we pay in taxes. Maxing out the TSP will reduce our taxable income by $18,000 when tax time comes around next year.
- It will help me achieve the broader goal. I realize it’s going to make it a little harder to pay off our mortgage by 2020 if I’m reducing our cash flow. But I know I need to start thinking about the other goal of achieving a net worth of $1M by 2025 right now if I’m going to make it happen, and maxing out the TSP will definitely help.
- Everyone else in the financial independence blogosphere is doing it. Ok, this shouldn’t be the reason to do anything. But after I thought about it and the reasons for and against it, it made a lot of sense. It wasn’t much of an adjustment, but every little bit helps.
I think the main reason I wasn’t maxing out my TSP before was because I thought I would need the money for more important things and that I might not have enough to pay for everything I needed to. But I realized that this small change would benefit me a lot, and I probably wouldn’t even notice the change.
As I was doing a little bit of research about this, I found that there are some reasons why you might not want to max out your 401(k)/TSP. You may have debt that you need to pay off. You may want to fund your emergency fund of 3-6 months of expenses. You may want to save for your kids’ education. Or you may be saving up to buy a house. There are plenty of reasons not to put all this money away in an account that will be very difficult to access until you are 59.5 years old. But if none of those reasons apply, you may want to consider maxing out your 401(k) if you aren’t already doing so. Your future self will thank you.
This was super helpful. My husband and I were just talking about maxing his 401k as our goal this! Lots to think especially since we always owe federal taxes!
Great! I’m glad it was helpful. It’s a small sacrifice now that makes a big difference later! And it helps at tax time.
Not a bad idea. My wife doesn’t contribute to her 401k because there is no matching. It might not be a bad idea to reduce our taxable income, though. As a realtor, do you if you can still use your 401k as a first time homebuyer without penalty? What’s the deal with that?
Yes, according to the IRS, as long as you haven’t had an interest in a home in the past 2 years, you qualify as a “first-time homebuyer.” You can take out $10,000 without penalty.
Congratulations! You will most likely find fewer things to buy each month. You will adjust to the difference fairly quickly, because you find you don’t really need lots of “stuff.” But the end result will be soooo worth it!
I hope so. We’ve been tracking our spending this month, and we are spending a ton on food and eating out. I’m currently looking into planning out meals in advance so we can eat healthier and save money.
I assume you don’t have a ROTH 401k option or you would have mentioned it here. For your situation what’s your take on it if given the option to choose between both?
I actually do have a Roth option in my TSP, but I don’t contribute to it. I would rather take the tax deduction now while we have a dual income and a higher tax rate. When I retire, I don’t think my tax rate will be as high as it is now (it will depend on our income and withdrawals). I do have a Roth IRA that I do have a little bit of money in. If we are able to retire early and before 59.5, I will probably slowly convert some pre-tax retirement money into post-tax retirement money. There are ways you can withdraw from a Roth before 59.5 without penalty (if you wait 5 years and only withdraw contributions, not earnings). I’m still learning about tax avoidance, so that might not be exactly right.
@PaulHasangKim. If you are in a relatively high tax bracket (>25%), I don’t think it’s worth paying taxes now (Roth), especially if you’re DINK(dual income no kids) and plan on going single income with kids in the near future. I think it’s worth doing the Roth option if you know you will be in a similar or higher tax bracket in the future.