Paycheck Chronicles

From The Mailbag: Changing TSP Contributions With Raises

One of the great benefits of military life is that there are regularly scheduled time-in-service raises. Sometimes they are teeny, and sometimes they are huge, but a large proportion of the active duty receives regular raises. Depending on where you are in your retirement savings, these raises may prompt you to shift your Thrift Savings Plan (TSP) contributions.

Dear Kate,

I'm going over 8 years of service this summer, and that has nearly a $300 raise. Do I need to do anything with my TSP contributions?

Thanks,

Happy E-6

That's a great question, but there is no single answer.

Dear Happy E-6,

I'd be happy, too. That's a huge amount of money, and there are so many productive things you can do with it. The short answer to your question is no, you don't need to do anything to your TSP contributions. They will continue to come out at the designated percentage (it will be more $$, but still the same percentage,) and if that pushes you near the IRS limits, the Defense Finance and Accounting Service (DFAS) will automatically curtail your contributions so you don't exceed the maximum allowable contributions.

However, there are two things that you might want to do.  If you aren't contributing the maximum allowable amount each year, take advantage of this opportunity to bump up your contributions by a percent, or three, without making your take home paycheck any smaller.

On the other hand, if you are already meeting the IRS maximum contributions, you could consider decreasing your contribution percentage.  This would mean smaller contributions each month vs. keeping the contribution level the same, but you would not have the December contribution curtailed to meet the IRS limits.  That question depends on your overall philosophy of budgeting and investing.  Some people would really prefer to front-end their investment contributions and receive that larger paycheck in December, other people would rather spread their investments regularly across the year and have a little bit more money in each paycheck.

Once you've figured out the TSP question, make a plan for the rest of that raise.  A chunk will go to taxes, of course, but even after TSP you may have some left over.  Will you take a planned amount out for fun, or put it all to "good use?"  Will you pay off debt, build your emergency fund or transition fund, or invest outside of TSP?  They're all good ideas, and few of us have enough money to do them all at the same time.

Thanks for writing in, and good job thinking ahead!

Kate

What a great problem to have!  What do you do with raises or bonuses?  Do you have a plan or just let them get absorbed into your overall spending?

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