Beyond the Paycheck: Financial Accounts that Matter to Feds

byDan Jackman/June 18, 2024

A man holds a sleeping baby while he reviews personal documents at home. Getting ahead on your finances for feds can set you and your family up for success

THIS #FEDLIFEHACK GENEROUSLY SPONSORED BY WAEPA

TSP Titan or Finance First-Timer? Your guide to finances for feds and the different types of financial accounts that matter most

Financial planning doesn’t have to be a one-size-fits-all approach. Perhaps you’re just starting your federal career and looking to lay a solid financial foundation. Or maybe you’re later in life with your job security established, debt under control, and perhaps even the kids out of the house and looking to catch up on savings. Either way, there are a variety of accounts designed to help you achieve your specific financial goals.

This guide will explore the different types of accounts available to you, from retirement savings and education planning to health savings and long-term investments. By understanding your options and making informed decisions, you can build a secure financial future and reach your full financial potential.

Bank Accounts for Feds

Federal Credit Unions
Credit Unions are designed for your unique needs and often provide low-cost checking and savings accounts with high-interest rates. Many credit unions will also have competitive interest rates available for members for auto loans and mortgages.

Retirement Accounts

Thrift Savings Plan (TSP)

This is the cornerstone of federal retirement savings. The TSP offers a variety of low-cost investment options, including stock-based funds (C, S, and I funds) for growth potential and bond-based funds (G and F funds) for stability. While some TSP millionaires focused on C, S, and I funds for most of their career, the right asset allocation for you will depend on your individual risk tolerance and time horizon.

If you’re eligible for an agency or service match, contributions spilling over toward the catch-up limit will qualify for matching up to 5% of your salary with a variety of investment options. The maximum contribution to the Thrift Savings Plan (TSP) for 2024 is $23,000 per year, which includes both traditional (tax-deferred) and Roth contributions.

What is catch-up limit? If you’re age 50 or older, the IRS allows you to make additional “catch-up” contributions to your TSP. This allows you to save more each year and accelerate your retirement savings. Workers can make catch-up contributions to a variety of retirement plans, including the TSP and employee-sponsored 401(k).

Employees who have retirement savings plans from their former employers, such as a 401(k), 403(b), or traditional IRA, may roll this money into the federal TSP account. The TSP’s investment options have lower fees compared to most other employer plans, talk with a financial advisor to decide the options best for you.

The Thrift Saving Plan website has more information to guide you through the process including an annuity calculator and free TSP webinars/courses covering topics for all participants and their beneficiaries.

Roth TSP
Similar to a Roth IRA, contributions are made with after-tax dollars but grow and can be withdrawn tax-free in retirement. If you qualify for federal match funds, you can contribute to your TSP at least up to this limit (3% of your salary). Beyond this, it can make sense to have a Roth IRA alongside your Roth TSP.
Federal Employee Retirement System (FERS) Special Contribution Account
Boost your retirement nest egg even further by contributing additional tax-deferred savings. It provides benefits from three different sources: a Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP). Two of the three parts of FERS (Social Security and the TSP) can go with you to your next job if you leave the Federal Government before retirement. To apply for benefits from the Federal Employees Retirement System (FERS) you must submit a retirement application, Standard Form 3107. The Office of Personnel Management has more information regarding eligibility for FERS.

Education Accounts

529 Plans
Save for future education expenses. You can contribute as much cash as you want and can afford. However, contributions to 529 accounts are completed gifts for federal tax purposes. This means that contributions and earnings grow outside the donor’s taxable estate and are exempt from federal estate taxes. However, contributions that exceed the annual exclusion amount are counted against the donor’s lifetime exclusion amount.

Earnings in a 529 plan grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses like tuition, fees, books, supplies, or room and board. Many states also offer a state income tax deduction or credit for contributions to the plan.

Want to learn more about 529 plans and whether it’s right for you or your family? Check out our Fed Life Hack covering the topic.

Health Savings Accounts

Health Savings Account (HSA)
(if enrolled in a High Deductible Health Plan) Save for qualified medical expenses with triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses.

Flexible Spending Account (FSAFEDS):

Offers three different flexible spending accounts (FSAs):

Health care flexible spending account: reimburses eligible health care expenses not covered by health insurance that are incurred by you, your spouse, and your children through the calendar year they turn 26.
Dependent care flexible spending account: reimburses eligible non-medical daycare and elder care for dependents.
Limited Expense HCFSA: reimburses eligible dental and vision expenses not covered by insurance covered incurred by you, your spouse, and your children through the calendar year they turn 26.

Employees can contribute between $100 and $3,050 per year to their FSAFEDS account, and are reimbursed for their out-of-pocket expenses. Contributions are not subject to payroll taxes, so employees can save around 30% on eligible expenses, depending on their tax bracket.

Health Insurance 101

Health insurance options can be confusing, especially if you’ve never had to choose coverage for yourself before, if you’ve had a change in family structure, or if you’re comparing different plans and companies. Our Fed Life Hacks covers the basics of health insurance lingo.

Investment Accounts

Brokerage Accounts
For long-term goals and to further diversify your portfolio you may consider investing in a variety of assets like stocks, bonds, and mutual funds.

Smart Savings Strategies for Feds

Create a Budget
When you begin to assess your financial position, the process begins with understanding where your money is going. Crafting a budget isn’t just about tracking expenses; it’s about uncovering opportunities to save and make your money work harder for you.

If you need some help getting started, our FedLifeHacks created a guide with options to get your budget going in the right direction. >>Budgeting
Start Early and Automate
The power of compound interest is your best friend. Even if you’re starting later in life, consistently saving can still make a significant difference in your retirement nest egg. The earlier you start, the more time your money has to grow over time. Setting up automatic contributions to your TSP, Roth, and other savings accounts can aid in consistent saving.

A recent study by Fidelity Investments (October 2023) found that retirement savers who started saving early and took advantage of compound interest saw their balances grow significantly faster than those who started saving later. The study showed that even small contributions made consistently over a long period can accumulate a substantial nest egg thanks to compounding. For example, the study found that someone who started saving for retirement at age 22 and contributed just $100 per bi-weekly paycheck until age 67, with an average annual return of 7%, could accumulate over $1 million by retirement solely due to compounding.
Maximize Employer Matching
Don’t leave free money on the table! Contributing enough to your TSP can capture the full government match, essentially providing a return on your investment. Consider aiming to contribute at least the minimum needed to capture the full match (typically 3-5% of your salary) and gradually increasing your contributions as your budget allows.
Review Regularly
As your life stages and financial goals change, periodically review your account allocations, contribution amounts, and overall financial plan. Many 401K management platforms have goal setting tools that allow you to assess the impacts of adjustment to your retirement contributions and risk tolerances.
Supplementing Your Income
While the FERS annuity and Social Security provide a solid foundation for your retirement income, they may not cover all your monthly expenses. You may need additional funds, especially in the early years of retirement before Required Minimum Distributions (RMDs) begin from your TSP. Consider building a healthy balance in your TSP to have a pool of funds available for withdrawals to supplement your income and cover unexpected expenses.
Seek Expert Guidance
If you need more assistance with planning, think about consulting with a trusted financial advisor to create a personalized plan aligned with your unique needs and risk tolerance.

Taking Charge of Your Financial Future

Retirement can last 20-30 years or even longer. In addition to regular living expenses, you may also face long-term care costs in the later years. Building a robust TSP nest egg can provide the financial security to cover these potential costs and ensure your retirement savings last throughout your golden years.

By understanding your benefits, utilizing the right accounts, and implementing smart savings strategies, you can build a secure financial future and achieve your financial goals.

The information provided in this piece is for your convenience and informational purposes only and not to be construed as professional advice. FEEA and its coauthors and sponsors are not liable for any losses or damages related to actions or failure to act with regard to the content in this piece.

Would you like to reprint this piece in your agency human resource, federal employee association, or union local newsletter? You can do so at no cost by contacting [email protected] with your request.