DEFINITION of Agency Matching Contributions
Agency matching contributions are contributions to a Thrift Savings Plan (TSP) held by federal government employees. Employees of the federal government are eligible to receive contributions to their TSP from the agency for which they work.
A TSP, established by Congress in the Federal Employees' Retirement System Act of 1986, offers similar savings and tax benefits provided by private corporations to employees’ 401(k) plans. The amount government employees receive is based on how they have saved and earned over their course of employment.
BREAKING DOWN Agency Matching Contributions
Through agency matching contributions, an agency can match 100% of an individual's contributions up to the initial 3% of his or her pay and a contribution of $0.50 for every dollar from the next subsequent 2% of pay used toward contributing to the thrift savings plan.
For example, a federal government employee working for the Department of Labor earns $1,500 each pay period and contributes 5% (or $75) into the thrift savings plan. The Department of Labor will then contribute a total of $60 (or 3% of $1,500 + (0.5 x 2%) of $1,500) toward his retirement in additional to his $75, which creates a total contribution per pay period of $135. After 5% of a salary, the agency won't match any additional contributions.
A further benefit comes from the fact that any matching contribution is not considered taxable income nor is it deductible the year it was made. However, even if you made your contributions to a Roth TSP, the matching contributions go into a traditional TSP plan. As a result, distributions of matching contributions, and the earnings on those contributions, are taxable.
Although you cannot access the contributions you’ve made to your TSP until a certain period of time has passed — usually two or three years, matching funds are not subject to vesting. Federal government employees that are able to contribute to a thrift savings plan should take advantage of the agency matching contribution.