Yes, contributions to the Thrift Savings Plan (TSP) are tax-deductible. When you make contributions to your TSP account, these contributions are made before federal (and in most cases, state) income taxes are deducted. This reduces your taxable income for the year, effectively making the contributions tax-deductible. However, you will pay taxes on the withdrawals you make after retirement, as the distributions are treated as taxable income at that time….(read more)

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Are TSP Contributions Tax Deductible?

The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees and members of the uniformed services. It is similar to a 401(k) plan for private sector employees, allowing participants to contribute a portion of their income to the plan on a tax-deferred basis.

One common question among TSP participants is whether their contributions are tax deductible. The answer is, it depends.

TSP contributions are tax deductible in the sense that they are made with pre-tax dollars. This means that the money you contribute to your TSP account is not included in your taxable income for the year, which can lower your overall tax bill. However, there is a limit to how much you can contribute to the TSP on a tax-deferred basis. For 2021, the maximum contribution limit is $19,500 for individuals under the age of 50, and $26,000 for those aged 50 and over.

It’s important to note that while TSP contributions are tax deductible for federal income tax purposes, they are still subject to Social Security and Medicare taxes. Additionally, some states may not recognize TSP contributions as tax deductible, so it’s important to check the tax laws in your state.

Another benefit of TSP contributions is that they can lower your adjusted gross income (AGI), which may make you eligible for other tax deductions and credits. For example, contributing to a TSP can lower your AGI to a point where you qualify for the Saver’s Credit, which is a tax credit designed to help low- and moderate-income individuals save for retirement.

In addition to the tax advantages, contributing to a TSP can also help you save for retirement and build a nest egg for the future. The funds in a TSP account grow tax-deferred, meaning you won’t have to pay taxes on any investment gains until you start making withdrawals in retirement.

In summary, TSP contributions are tax deductible in the sense that they are made with pre-tax dollars, but there are limits to how much you can contribute on a tax-deferred basis. It’s important to take advantage of this tax benefit and contribute as much as you can to your TSP to maximize your retirement savings and potential tax savings. Be sure to consult with a tax advisor or financial planner for personalized advice on your retirement savings strategy.