The ThriftLine TSP “Highlights” newsletter for January/February 2010 was sent out with our annual account summary. To help people understand the power of tax deferred contributions, they gave this example:
“For example, for a TSP participant making $38,000 a year, a 5% TSP contribution from biweekly pay would be $73, but the participant’s paycheck would be reduced by only $61.” (Assumptions: married contributor with two children, 2008 tax table.)
Another way to look at it is that for that tax year, the participant’s taxable income was $36,100 but they were able to save $1,900 in their account, which will grow tax deferred until they begin to take distributions. The government lets you keep the money to save and invest, and then you pay taxes on what you take out at retirement.
In late 2011 we’ll have another choice, the ROTH-TSP. Stay tuned for more conversations about the pros-and cons, of this option. For now, however, save as much as you can. You’ll be glad you did in the future.