What The 2018 IRA Contribution Cap Means for Federal Employees

Employees who enter the public sector often turn to an IRA for their retirement planning. They’re used to the concept of an individual retirement account and might have one already set up by an employer or on their own if they are self-employed. However, contribution caps to IRAs can affect how much employees save each year. If they want to save more or set aside tax-deductible money than the government allows for IRAs, there are other options.

In particular, a Thrift Savings Plan can help employees set aside additional income for the future. These TSPs operate like 401(k) and have higher contribution caps. If you are a federal employee who hasn’t set up a TSP, it might be ideal for your situation.

Keep reading to learn about changes to employee IRAs and TSPs as alternative savings plans.  

What Is The 2018 IRA Contribution Cap?

Annually, the IRS sets contribution limits for employees for Individual Retirement Accounts. These limits determine how much employees can deduct on their federal income tax. Employees are limited to contributing $5,500 tax-deductible funds to their IRA in 2018, with an additional $1,000 allowed for employees older than 50.

This isn’t a change from last year, which means if you met the limit in 2017, you’re likely to also reach it again in 2018 if you maintain your current contribution levels. In fact, the last time the IRS increased contribution levels, it was 2013 when it moved the limit from $5,000 to its current ceiling.

The Motley Fool is quick to state that this limit is on a per-person level, not per account. If you have multiple IRAs, you can only contribute $5,500 for all of them. Many employees that set aside 7-10% of their income reach the cap of $5,500 over the course of the year, making them wonder where they can set aside money in an investment that grows it. This is where Thrift Savings Plans come in.

How Do Thrift Savings Plans Differ from IRAs?

TSPs operate like 401(k)s in that individuals contribute monthly sums that the government matches to a certain extent. There are multiple TSPs to choose from based your tolerance of risk, which means you might want to change your investment as you approach retirement age and have a lower-risk tolerance. Naturally, lower-risk investments have lower rewards, which means each individual will choose their TSP based on their needs and comfort levels.

The elective deferral limit for a Thrift Savings Plan is $18,500. Employees who are part of the Federal Employees Retirement System (FERS) should contribute $712 per pay period (over the course of 24 payments annually) if they want to reach this cap with matching government contributions.

Employees who recently signed up for TSP can make catch-up contributions under certain criteria. A few of the requirements to make catch-up payments include:

• The employee must be over the age of 50 or turning 50 in 2018.
• The contributor must be a current paid employee of the federal government.
• The employee is contributing enough to reach the full $18,500 limit by the end of the year.

TSPs are meant to serve as part of FERS or the Civil Service Retirement System (CSRS) established in 1920. Employees who worked in the private sector and had a 401(k) are more likely to choose this option because they’re comfortable with the concept of investing based on risk.

Should You Invest in an IRA or TSP?

There are multiple differences between IRAs and TSPs, and the choice to invest in one or the other depends on your own personal choices and needs. For example, a few of the differences other than the contribution limits include:

• TSP contributors must be at least 59.5 to make withdrawals from their accounts without penalties while IRA owners can do so at any age.
• TSP contributors must take minimum mandatory distributions starting at age 70.5 or face a penalty from the IRS, while no such required payouts must be made with an IRA.
• TSPs contributions are made with pre-tax dollars, which means people pay taxes on the payouts. IRA contributions can choose whether to pay taxes up front or as part of the payout.  

It’s possible to invest in both a TSP and an IRA. Your financial situation might be strong enough that contributing to both helps you balance out the risks and future income pans.  

Discuss Your Retirement Options With a Specialist Today

There are multiple options for employees to invest their money and save for retirement. The fact that you want to start saving and preparing for life after work is a great sign for the future ahead.

If you’re considering adding a TSP to your retirement plan or changing your IRA, talk to a benefits specialist today. We can review your situation and discover options you might not have previously considered. A few small steps today can set you up for a successful retirement in the future. Contact us today.