Expanded Roth TSP Catch-Up Contribution Opportunities

Expanded Roth TSP “Catch-Up” Contribution Opportunities Resulting from SECURE Act 2.0 Passage

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 1.0 (passed into law in December 2019 and taking effect January 1, 2020) made some major changes to individual retirement arrangements (IRAs) and to defined contribution plans (such as 401(k) and 403(b) retirement plans and the Thrift Savings Plans (TSP)). In December 2022, SECURE Act 2.0 was passed into law. SECURE Act 2.0 contains numerous provisions that affect defined contribution plans. One of these provisions is expanded Roth defined contribution plan “catch-up” contribution opportunities. The other provision is a requirement that “high wage” individuals who make “catch-up” contribution via payroll deduction to their qualified retirement plan are required to make those contributions to the Roth (after-taxed) accounts and not to their traditional (before-taxed) accounts. For federal employees, this means that “high wage” federal employees aged 50 or older must make TSP “catch-up” contributions to the Roth TSP and not to the traditional TSP.

Both of these provisions are discussed in more detail in this column. Note that each provision has a different starting date.

“Catch-Up” Contributions Subject to Roth Treatment

Effective for tax years beginning after December 31, 2023, federal employees at least age 50 on the last day of the year and who are “high wage” TSP participants, can make TSP “catch-up” contributions only to their Roth TSP account and not to their traditional TSP account. For the purpose of this new provision under SECURE Act 2.0, a “high wage” TSP participant is a federal employee whose wages (as defined in Internal Revenue Code Section 3121(a)) during the preceding calendar year exceeded $145,000, adjusted for cost-of-living increases through the years. The following example illustrates:

Example 1. Janet, age 58, is a federal employee who contributes the maximum amount to the TSP each year. She contributes both to the traditional TSP and to the Roth TSP. During 2023, she will be contributing a maximum $30,000 ($22,500 regular contributions that all employees can make and $7,500 “catch-up” contributions) to the TSP of which $27,000 will be contributed to the traditional TSP and $3,000 will be contributed to the Roth TSP. Janet’s gross salary during 2023 will be $180,000. Assuming that the TSP contribution limits during 2024 are the same as they are during 2023, Janet will have to contribute at least $7,500 to her Roth TSP account during 2024. This is because Janet’s wages will exceed $145,000 during 2023 (and therefore Janet is considered a “high wage” TSP participant).

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Observation: The “Rothification” of TSP “catch-up” contributions for “high wage” TSP participants will introduce several new administrative issues and complexities for the TSP. Starting sometime later this year, the TSP will need to establish a process for identifying “high wage’ TSP participants over age 49. The TSP will need to use a “compensation” definition (salary for purposes of Internal Revenue Code Section 3121(a)) that may be different than the TSP ‘s current compensation definition used for determining TSP contributions.

Increase in Catch-Up Limit for TSP Participants Aged 60-63

For tax years beginning after December 31, 2024, SECURE Act 2.0 allows an increased “catch-up contribution” for years in which the TSP participant is aged 60 to 63 at the end of the year. The increased “catch-up” contributions for 2025 will be the greater of $10,000 or 150 percent of the regular “catch-up” contribution limit for 2024, indexed for inflation. The following example illustrates:

Example 2. Same facts as in Example 1 except that it is the year 2025 and Janet is age 60 and is still in federal service. Assuming that the 2024 TSP catch-up contribution limit is $7,500, then 150 percent of $7,500 equals $11,250, which is more than $10,000. Therefore, Janet’s 2025 “catch-up” TSP contribution limit is $11,250 during 2025. If Janet wants to make the maximum possible TSP contribution for 2025, then she will contribute the regular TSP amount (suppose that limit is $22,500 during 2025) plus the “catch-up” contribution amount of $11,250. Assuming Janet is a “high wage” employee during 2025 and intends to maximize her 2025 TSP contributions ($22,500 plus $11,250 or $33,750), she must contribute all $11,250 (“catch-up” contribution limit) to her Roth TSP account.

Observation. While the age 60 to 63 enhanced “catch-up” contribution limit is generally expected to improve retirement readiness for federal employees who are closest to retiring, it will also add layers of administrative complexity to the TSP. Currently, the TSP needs only to track which TSP participants are (or who will be) age 50 or older by the end of the calendar year. Once the age 60 to 63 “catch-up” limit takes effect on January 1, 2025, the TSP will also need to track which TSP participants will attain ages 60, 61,62 or 63 during the current calendar year. The TSP will then have to ensure that the applicable age 60 to 63 “catch-up” contribution limit is properly applied. Similarly, the TSP will have to track which employees reach age 64 during the calendar year and therefore “age out” of the enhanced age 60 to 63 “catch-up” contribution limit and revert back to the regular (not enhanced) age 50 “catch-up” TSP contribution limit.

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.