Cutting back on contributions question.

[respro]

Hey folks, just wanting to know your thoughts on an issue I've been thinking about. I'm currently at 12% contributions into TSP. I'm wondering when it would be prudent to cut those contributions back to just agency matching levels. This is what I mean. As a balance grows to higher levels the contributions don't serve the purpose that they once did in my account in a way. At first my account balance was growing and I was adding shares. Now I am adding shares but it's not "moving the needle" as much as at first in a manner of speaking. I can move the needle with some smart TSP IFTs more than those contributions. I'm wondering if it would be a good idea to drop the contributions down to agency matching and invest the money in an outside account. This is assuming I think I can beat the TSP of course. What do you folks think???
Respro

 

[Boghie]

Respro,

Take your dollar contribution amount and add the resulting dollars saved by your highest Federal and State income tax rates. For example:

If you are in the Federal 25% tax bracket and California's State bracket of 8% and you contribute $200 in cash per pay period than:

$200 + ((.25 + .08) * 200) = $266​

Thus, in a post tax environment, you would have to earn $266 to invest $200. Uncle Sam and Governor Moonbeam would grab the $66. Additionally, if you are not careful about fees you will end up paying 2% of your assets to some brokerage house rather than the 0.2% going to Black Rock. Finally, you will pay capital gains and dividend taxes on earnings over the year (cashed in). You pay no tax on the dividend reinvestment that takes place in TSP - or, for that matter, any tax advantaged account.

Also, remember that the $200 that you invest in a single pay period will double in 7 - 10 years and double again in the following cycle (normal returns)

Your idea is not bad, but you have to number crunch it. By investing outside TSP you will have a huge wealth of options not available in TSP. And, if you bit the bullet and pay the gubmint you will have access to your assets.

 

[craigerv]

respro, I've thought about this too, though my time frame is far into the future to implement. I was thinking that after 10 or so years in the tsp I would have a decent grasp on what I think my return rate will be like. Once my contribution percentage added is dwarfed by my return rate, then I was thinking it wouldn't be too harmful to contribute less and invest that money elsewhere. It depends on your goals and time frame. I don't think it's necessarily a bad idea as long as you're still saving/investing the money well. Since you're already used to saving 12% from your paycheck, I think it's wise to invest that money before you become used to spending it.