Roth TSP for Participants Over Age 50 (Catch-Up Contributions)

For our Feds, a Thrift Savings Plan (TSP) is a foundational element of the overall investment portfolio. While TSP is likely not new to you, certain provisions, including catch-up contributions and the Roth option, offer opportunities to further optimize your savings plan. 

If you’re age 50 or older and meet the eligibility requirements, you can make catch-up contributions to your TSP. In 2024, this means you can contribute an additional $7,500 beyond the standard $23,000 annual elective deferral limit.  Allocating all or part of your contributions to the Roth option in your TSP allows you to combine the benefits of catch-up contributions with Roth tax advantages.

Eligibility for Catch-Up Contributions

To be eligible for catch-up contributions to TSP, you must:

• Have reached age 50 or older during the calendar year in which the contributions are made.
• Be currently employed and in pay status.
• Have already contributed the elective deferral limit for the year.

Benefits of Catch-Up Contributions

Catch-up contributions allow you to turbo-charge retirement savings in your final working years. The additional contributions may benefit from compounding growth, which can significantly increase retirement savings even when invested over a short period. This investment boost is particularly beneficial for those who may have started saving later in life, relinquished retirement savings as a result of a divorce, or who were unable to contribute the annual maximum in their younger years due to competing priorities. It's worth noting, though, that you'll only see the benefit of compounding interest if your funds are invested! Appropriately allocating your TSP amongst the investment options available in the plan can provide opportunities for growth.

How to Make Catch-Up Contributions

To contribute to your TSP, complete the Election Form (TSP-1 or TSP-U-1) or make the request through your agency’s electronic system. You do not need to make a special election for catch-up contributions. Once you reach the elective deferral limit, additional contributions are automatically credited toward the catch-up limit. You may start, stop, or change your contribution amount at any time. And don't worry about over-funding-- the TSP will automatically pause your contributions until the first pay period of the following calendar year once you've hit the maximum annual elective deferral plus catch-up contribution limit. 

Understanding Roth vs. Traditional TSP

Roth TSP contributions are funded with after-tax dollars, while traditional TSP contributions are funded with pre-tax dollars. Both grow tax-free while the funds are held inside the plan. 

While withdrawals from a traditional TSP are taxable as current income in the year in which they are withdrawn, Roth TSP withdrawals are not taxable, as long as the account has been open for at least five years and you are at least 59 ½ when you make the withdrawal (certain unique situations provide for distributions as early as age 55). Roth withdrawals may also be tax-free if they occur because you are retiring due to a disability or as part of a beneficiary distribution after the account holder's death.

Strategic Considerations

As you begin maxing out your TSP and making catch-up contributions, considering the tax implications of your savings strategy becomes vital. With the current federal tax rates set to increase beginning in 2026 due to the expiration of the Tax Cuts and Jobs Act, now is an opportune time for many Feds to be making Roth TSP contributions. By electing to add money to your TSP on an after-tax basis now, you are able to pay taxes at the current lower rates rather than the higher expected future rates, which can save you money on taxes over the long-term as your Roth TSP contributions continue to grow tax free, year after year. 

Integrating Roth TSP contributions into your contribution strategy can help ensure you have a mix of taxable and tax-free income sources in retirement, providing flexibility to more effectively manage your tax burden. Remember, your employer match contributions are always going to go into the traditional (pre-tax) bucket, so allocating some of all of your own TSP contributions to the Roth option can provide you with some tax-diversification. 

To find out if Roth TSP is right for you, we encourage you to reach out to a qualified professional to evaluate your unique financial situation. Feel free to reach out to the team at Serving Those Who Serve at [email protected] to schedule a free financial planning consultation and see if we can be of service!