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.