TSP investors get automatic break on taxes

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Now that you've settled your 2006 tax bill with Uncle Sam, more than 200,000 active feds need only the stroke of a pen or the click of a mouse to give themselves a 4 percent tax-deferred pay raise and get a tax break for the length of their career.

It involves signing up for the federal 401(k), the Thrift Savings Plan.

Every two weeks -- each payday -- non-investors lose out on the untaxed raise. At retirement, analysts say, nonparticipants will have about 50 cents for every $1 their investing colleagues have to spend.

Most people working for the government today are under the Federal Employees Retirement System. FERS has a less generous civil service annuity but offers workers a much more generous 401(k) plan than longtime feds under the old Civil Service Retirement System. Congress designed it that way to cut pension costs by forcing everyone hired under the new FERS plan to help build their own retirement nest egg. The vehicle is the Thrift Savings Plan.

To nudge feds to help finance their own retirement, Congress gave all FERS employees a 401(k) account and put 1 percent of their income into it as a government match. To get that match, all the person would have to do is get hired and keep showing up for work.

But most FERS employees take advantage of that employer match, which can add up to 4 percent on top of the 1 percent all of them get automatically. That means FERS workers who invest 5 percent get the full match.

Pension plan fears

Many federal and postal workers are unnerved by reports that Congress is working on a plan to trim future retirement benefits.

Not true. It isn't.

Because of the report, some feds are planning to retire before the effective date of the pension cut that isn't going to happen.

Three words: Don't do it.

Federal retirement benefits are based on length of service and the employee's highest three-year average salary. According to the scare story, the planned change would put feds on a high-five system.

Again, not true.

This is one of those money-saving ideas that has surfaced every year for the past dozen years. Not to worry. The budget plans approved by both the House and Senate don't contain any language that would trim, or even touch, the federal benefits package.

• Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey @federalnewsradio.com.