Each year, IRS rules limit the amount that employees can contribute via payroll deduction to their qualified retirement plans such as 401(k), 403(b) and 457 retirement plans. Federal employees are limited as to the amount of what they can contribute to the Thrift Savings Plan (TSP). These employee contribution limits are called annual “elective deferral” limits. There are also “catch-up” contribution limits for employees over age 50.
During calendar year 2024, federal employees were limited in contributions to maximum of $23,000 to their TSP accounts (a combination of traditional TSP and Roth TSP), while employees aged 50 and older during 2024 were limited to an additional $7,500 to their TSP accounts in “catch-up” contributions, resulting in a maximum contribution to the TSP during 2024 of $30,500.
This column explains what happens when an employee, participating in more than one qualified retirement plan during 2024, makes “excess” contributions.
During 2024, some federal employees may have participated in the TSP and another qualified retirement plan (such as a 401(k), 403(b), or a 457 qualified retirement plan). For those employees covered by the Federal Employees Retirement System (FERS), an employee’s automatic agency contribution of one percent of the employee’s SF 50 salary and agency matching contributions (maximum four percent) were not included in the $23,000/$30,500 limits for calendar year 2024.
The following example illustrates how a federal employee made excess “elective deferrals” and “catch-up” contributions to the TSP and to another qualified retirement plan during 2024.
Jason, age 57, retired from federal service on July 31, 2024. Between January 1,2024 and July 31,2024, Jason contributed the maximum of $30,500 to his TSP account. On September 1, 2024, Jason started a new job in private industry. His new job offered a 401(k) retirement plan that Jason participated in for the remainder of 2024. Between September 1,2024 and December 31,2024, Jason contributed $9,000 to his 401(k) plan. Jason therefore contributed during 2024 a total of $30,500 plus $9,000, or $39,500, in elective deferrals to the TSP, thus exceeding the 2024 elective deferral limit of $30,500 for employees aged 50 or older during 2024 by $9,000.
In order to explain what happens when a federal employee makes excess elective deferrals and “catch-up” contributions to more than one qualified retirement plan including the TSP, the following situations are presented:
Situation 1. A federal employee who was also a member of the Uniformed Services Ready Reserves during 2024 contributed both to the civilian TSP and to the Uniformed Services TSP.
The federal employee has two TSP accounts – a civilian TSP account and a Uniformed Services account. The employee is a member of the Ready Reserve, and when he or she goes on active duty, he or she is allowed to contribute to a Uniformed Services account. In January of every year, the TSP will check to see whether the employee’s combined contributions to his or her civilian TSP account and Uniformed Services TSP account have not exceeded the “elective deferral” and “catch-up” contribution limits.
To do so, the TSP will add the traditional TSP and Roth TSP contributions made to both accounts. The TSP will then return any contributions that exceeded the applicable limit, along with attributable earnings associated with those contributions. This action will be performed by the TSP before April 15, 2025. The employee need not take any action.
Note the following:
- Traditional tax-exempt contributions made to a Uniformed Services traditional TSP account using tax-exempt salary while serving in a combat zone do not count toward the “elective deferral” limit.
- Elective deferrals and their accrued earnings made to a Uniform Services account will be returned to an employee before those elective deferrals made to a civilian TSP account.
- If an employee made both traditional TSP and Roth TSP contributions during the year, any excess deferrals plus their accrued earnings will include a proportional amount from the employee’s traditional TSP and Roth TSP account balances.
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Situation 2. A federal employee contributed both to the TSP and to another qualified retirement plan during 2024.
Federal employees who contributed both to the TSP and to another qualified retirement plan during 2024 will know how much they contributed to both retirement plans when they receive their 2024 Form W-2 statements from their employers in January 2025. In particular, Box 12 of Form W-2 shows the total “elective deferrals” and “catch-up” contributions. In particular, Box 12D will show the total amount of “elective deferrals” and “catch-up” contributions made to the traditional TSP or to traditional qualified retirement account, while Box 12A will show the amounts of “elective deferrals” and “catch-up” contributions made to the Roth TSP or to the Roth qualified retirement plan. It is the employee’s responsibility to add the total “elective deferrals” and “catch-up” contributions from each Form W-2 statement to make sure the total contributions from both retirement plans do not exceed the 2024 contribution limits of $23,000/$30,500.
If an employee discovers excess deferrals, then the employee will have to decide from which retirement plan to request a refund of excess deferrals. The employe is advised to request a refund of excess deferrals from the retirement plan that will result in the least amount of loss of employer matching.
The TSP Refund Process of Excess Deferrals
If an employee made excess elective deferrals to the TSP and to another qualified retirement plan during 2024, then the employee can request a refund of excess TSP contributions. In early to mid-January 2025, the TSP will make available Form TSP-44 (Refund Request Form). To request a refund of excess deferrals made to the TSP during 2024, a federal employee must log in to “My Account” and request TSP-44. The employee may also contact the ThriftLine Service Center. A properly filled out and timely submitted Form TSP-44 will result in the return of the excess deferrals and accrued earnings to the federal employee.
The federal employee must fill out and submit the most recent version of Form TSP-44. To know whether the most recent version of Form TSP-44 is being used, the employee should check the upper right-hand corner (under the form name) for the tax year. If a request for return of excess elective deferrals made during 2024 is being made, then the form should show “Tax Year 2024”.
Form TSP-44 must be FAXED or mailed to the TSP and postmarked to the address provided on Form TSP-44. In order to obtain a refund of excess deferrals made during 2024, the deadline for mailing Form TSP-44 with a postmark is March 15, 2025. TSP Form TSP-44 will be removed from the TSP web site immediately after March 15, 2025.
Tax Consequences of Making Annual Excess Deferrals Including “Catch-Up” Contributions
Excess deferrals are treated as income in the year in which the employee made the contributions, whether or not the excess deferrals are refunded to the employee.
An employee who made traditional TSP and other traditional qualified retirement plan deferrals must report the total amount of the excess deferrals on the employee’s income tax return as taxable wages for the year in which the employee made the excess deferrals. Roth TSP and Roth qualified retirement plan money excess deferrals are also taxable wage for the year in which the employee made the excess deferrals. However, the amount that is supposed to be reported as excess Roth deferrals is already reported as income in Box 1 of the employee’s Form W-2 statement.
Treatment of Earnings on Excess Deferrals for Tax Purposes
Earnings distributed with excess deferrals are considered taxable income in the year in which the earnings are distributed and not in the year when they are earned. Any earnings on excess Roth TSP contributions are considered taxable income as well.
Employees will receive a separate IRS Form 1099-R indicating the amount of the distributed earnings. The earnings must be reported as retirement income on an employee’s tax return for the year in which the distribution is made.
There are three other tax-related issues concerning excess deferrals to the TSP:
- “Early” withdrawal and IRS penalties. If the distribution of 2024 excess deferrals and associated earnings is made by April 15, 2025, then the distribution will not be considered an early withdrawal and not subject to the IRS’ 10 percent early withdrawal penalty.
- Consequences of not making a distribution of 2024 excess deferrals by April 15, 2025. After April 15, 2025, a TSP participant cannot request to have 2024 excess deferrals refunded. The excess deferrals will instead remain in the TSP participant’s account. As such, when the traditional TSP account is distributed in the future, the TSP participant will be taxed twice on the distribution; namely, once in the year in which the excess deferrals were made and then in the year the TSP participant separates and withdraws the traditional TSP account. Accrued earnings on the excess deferrals are taxed only once, when the account is withdrawn. If the 2024 excess deferrals were made to the Roth TSP account and the excess deferrals are not made by the April 15,2025 deadline, then the Roth TSP excess deferrals will not be treated as after-taxed contributions. As such, the “double-taxation” rule associated with traditional TSP excess deferrals will apply to excess Roth TSP contributions. The accrued earnings associated with Roth TSP excess deferrals will also be taxable. This is the case even if the Roth TSP participant meets the qualified Roth TSP distribution requirements.
- Contributions to IRAs (both traditional IRAs and Roth IRAs) are not included in TSP excess deferrals. A “contributory” IRA is an IRA in which an individual with earned income during the year can make a contribution. An IRA is not a qualified retirement plan. As such, a federal employee could have maximized his or her contributions to the TSP during 2024 ($23,000/$30,500) and can contribute the maximum possible to an IRA, traditional IRA and/or Roth IRA for 2024. Maximum IRA contributions for 2024 is $7,000 for employees younger than age 50 as of December 31,2024, and $8,000 for an employee older than age 49 as of December 31, 2024. The deadline for making a 2024 IRA contribution is April 15, 2025.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.