How Does TSP Matching Work?

Matching contributions in federal thrift savings plans don't increase your taxable income.

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Working for the federal government features a variety of benefits, including having your agency contribute to your thrift savings plan (TSP). A TSP plan is the federal-employee counterpart of a private-sector 401(k) plan. If you are a federal civilian employee who was hired after January 1, 1984, you are eligible for matching contributions. If you don't take full advantage of the matching contributions, you're leaving money on the table.

Automatic TSP Contributions

If you are a worker in the Federal Employees Retirement System, your agency automatically contributes an amount equal to 1 percent of your income to your TSP. These contributions are on top of your annual salary. For example, if you make $65,000 per year, you receive $65,000 in paychecks, and your agency automatically contributes $650 to your TSP each year. These automatic contributions by your agency start immediately.

TSP Agency Matching

In addition to the automatic contributions, if you're a participant in the retirement system, you're also eligible for matching contributions based on the amount you contribute. Your agency matches the first 3 percent of your salary on a dollar for dollar basis, which effectively doubles your contribution. The next 2 percent of your income is matched 50 cents per $1 you contribute.

After 5 percent of your salary, the agency won't match any additional contributions. However, if you're part of the Civil Service Retirement System, you aren't eligible for matching contributions.

Roth TSP Option

Unlike a traditional TSP, which holds funds that are taxed when you withdraw them, a Roth TSP works in the opposite direction. This means that if you have a Roth TSP, your funds are taxed on their way into the plan, and you won't owe income tax when you take withdrawals, called distributions, from the plan. Distributions are not only tax-free for the contributions you made to the plan, but the interest you earned is also tax-free.

Worthy of note is that your agency's contributions to your TSP go toward a traditional TSP, but you can designate all or part of your contributions to a traditional TSP or a Roth TSP.

Matching Contribution Tax Treatment

When the agency makes a matching contribution on your behalf, the contributions do not count as taxable income for the year, and they are not deductible. Effectively, they have no impact on your income in the year of the contribution. However, even if you made your contributions to a Roth TSP, the matching contributions go into a traditional TSP plan. As a result, distributions of matching contributions, and the earnings on those contributions, are taxable.

Matching Contribution Vesting

You aren't immediately vested in the automatic contributions to your TSP. "Vested" means that you get to keep the contributions and the earnings on the matching contributions when you leave the job. Generally, you become vested once you've worked for the government for three years.

However, certain congressional and non-career positions allow vesting after two years. If you die, you're automatically considered fully vested. The agency's matching contributions, on the other hand, are not subject to the vesting requirements.