How to Pay Into a TSP to Reduce Taxes

The Thrift Savings Plan, or TSP, is a retirement program for federal government employees, including military personnel. It operates much like a 401(k) and can provide participants with benefits such as retirement funds and money for emergencies or special needs, such as medical bills or purchasing a home. If you are eligible to participate in a TSP, you can use it to reduce the amount you pay in taxes, often with minimal impact to your net pay.

Current Taxes

Enroll in the TSP program through your place of employment. In some cases, such as those covered by the Federal Employees Retirement System (FERS), you are enrolled automatically and payroll deductions begin immediately. If you are not automatically enrolled, fill out the enrollment form available through your human resources department.

Specify how much of your income you want to contribute to your TSP account. The larger your contribution to your TSP account, the lower your current tax obligation will be. To get the most tax benefit, contribute the maximum amount allowed.

Check your TSP contributions as the end of the year approaches. You may find that you have not reached the maximum annual limit, an amount that can vary from one year to the next. Increase your contribution percentage or change it to a flat rate so that you reach the limit by the end of the year for maximum tax benefit. The Internal Revenue Code (IRC) establishes the maximum elective deferral amount each year. For 2012 that amount is $17,000.

Future Taxes

Enroll in the TSP Roth account. Roth programs have specific eligibility requirements, so check with your human resources department to make sure this is an option for you before you sign up.

Contribute the maximum allowable amount to your account. Roth contributions are made after taxes, meaning that you have to pay taxes on any money you contribute to your Roth TSP account before it goes into the account. The total of all TSP contributions combined cannot exceed $17,000 for 2012.

Leave the money in the account until you retire. Removing money early may have negative tax consequences, including a 10 percent Internal Revenue Service penalty. Roth funds and their earnings are not taxable once you reach retirement age, and in certain other circumstances, such as if you become disabled. The result is that even though you paid tax on the original amount, you avoid paying it on your Roth account earnings.