Understanding Contribution Limits and Catch-Up Contributions for Roth TSP

As federal employees plan for their retirement, understanding the nuances of the Thrift Savings Plan (TSP) is crucial. Among the various options available, the Roth TSP stands out for its unique tax advantages and contribution strategies. Besides reviewing recent and upcoming changes to catch-up contributions to the Roth TSP, this article will also review the specifics of Roth TSP contribution limits, catch-up contributions for those aged 50 and older, and strategies to maximize your retirement savings. 

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Recent and Upcoming Changes: Roth TSP Contributions and Catch-Up Limit

Increased Catch-Up Limit for Federal Employees Ages 60–63

Thanks to SECURE Act 2.0, specifically section 109, starting January 1, 2025, TSP catch-up contributions dramatically increased for those aged 60 to 63. For this year, those in this group could contribute an additional $11,250 (higher catch-up limit, up from the regular catch-up limit of $7500, available when you turn 50) on top of the current standard $23,500, totaling $34,750.

*The additional catch-up is not available the year you turn 64. 

Catch-Up Contributions May Require After-Tax Dollars Starting in 2026

Starting in 2026, if your income is above $145,000, your catch-up contributions need to be go into a Roth TSP account. The ability to reduce your current year’s income would be gone, but the process will still grow tax-deferred and potentially be tax-free at distribution. The tax treatment may be different, but annual limit amounts for the contributions you make are the same as the above chart. Pre-tax traditional TSP contributions can be made with catch-up dollars next year and beyond if your gross annual income is below the $145,000 threshold.

Federal Benefits Information: Roth Conversions and Benefits of Roth TSP

Roth Conversions and Savings Goals

A Roth conversion is a financial strategy where you transfer money from a traditional retirement account, like a traditional IRA or 401(k), into a Roth IRA. To summarize the maneuver, you pay income tax on the amount you convert now, but the benefit is that the money can grow tax-free in the Roth IRA and won’t be taxed when you withdraw it later (as long as you follow the rules). This can be a smart move if you expect to be in a higher tax bracket in retirement or if you’d like to minimize required minimum distributions (RMDs), which Roth IRAs don’t have. 

Consider Making the Decision to Convert Your Retirement Savings, is it right for you? Schedule a meeting with a Fed-Expert Financial Planner. 

In-Plan Roth Conversions Coming to TSP Next Year

For the rest of the year, to convert funds in a traditional IRA into a Roth IRA after rolling over traditional TSP funds is the only way to convert pre-tax TSP money into post-tax money in a Roth. Starting January 1st, however, the TSP will begin allowing in-plan Roth conversions. Converting employee contributions and the government matches, which have to go into the traditional TSP, into a Roth account could be a gamechanger for some federal workers and their retirement plan. Whether this strategy is right for you depends on your unique financial situation. 

Benefits When You Contribute to Your TSP Roth Account

Contributing to a Roth TSP offers several benefits. One of the primary advantages is the potential for tax-free growth and withdrawals, which can significantly enhance your retirement savings. Additionally, the Roth TSP provides flexibility in tax planning, allowing you to diversify your tax exposure by having both pre-tax and after-tax retirement accounts. This can be particularly advantageous in managing your tax liabilities during retirement. Furthermore, the Roth TSP is subject to the same contribution limits as the traditional TSP, allowing you to maximize your annual contributions.

Eligibility for Roth TSP and 2025 Maximum Contribution Amount

Eligibility to contribute to a Roth TSP is extended to federal employees who are eligible for the Thrift Savings Plan. This includes members of the uniformed services and civilian employees of the federal government. Unlike a Roth IRA, there are no income limits for contributing to a Roth TSP, making it accessible to all eligible employees regardless of their income level. For the calendar year 2025, the maximum contribution amount for the TSP is $23,500. If you’re 50 or older, as illustrated in the above chart, you can contribute more toward the catch-up limit of $7000 (or $11,250 beyond the standard limit if turning 60 to 63). The TSP website can help federal employees contribute pay each pay period to get the full match and inform them when they reach the annual maximum. 

How Do Catch-Up Contributions Work for Those Age 50 and Older?

Catch-up Contribution Limit for 2025

The catch-up contribution limit is an additional amount that employees aged 50 or older can contribute to their TSP accounts, including the Roth TSP. For 2025, the catch-up contribution limit did not increase, remaining at $7000. Only those between ages 60 and 63 can contribute more toward their retirement savings. This higher catch-up contribution limit is designed to help older employees who may have started saving later in their careers to bolster their retirement funds as they approach retirement age in their later working years.

Catch-Up Contributions Allow for Increased Retirement Income 

Making catch-up contributions offers several benefits for federal employees nearing retirement. These additional contributions can significantly enhance retirement savings, providing a larger financial cushion during retirement. Catch-up contributions also offer a strategic advantage in tax planning, as they allow employees to increase their retirement savings without exceeding the standard contribution limits. Furthermore, these contributions can help employees who may have missed out on earlier savings opportunities to catch up and secure a more comfortable retirement. In-service withdrawals from the TSP can start at age 59½ and withdraws from the TSP in retirement can start as soon as age 55 (if retiring with an immediate pension from the Federal Employee Retirement System, or FERS) or 50 if retiring under special provisions, with no portion going toward the IRS penalty. 

Estimate your retirement income from the TSP with our Thrift Savings Plan Calculator.  

How to Maximize Your Thrift Savings Plan Contributions?

Best TSP Strategies to Maximize TSP Contributions

Maximizing TSP contributions requires a strategic approach to retirement savings. One effective strategy is to contribute the maximum allowable amount to your TSP account each year, including taking advantage of catch-up contributions if you are eligible. Additionally, employees should consider the timing of their contributions, ensuring that they are spread evenly throughout the year to maximize the benefits of dollar-cost averaging. Regularly reviewing and adjusting contribution amounts in response to changes in income or financial goals can also help maximize retirement savings.

Government Matching Contributions into your TSP account

Matching contributions are a significant benefit of the TSP, as they provide additional funds to your retirement savings at no extra cost to you. Federal employees should aim to contribute at least enough to receive the full employer match, as this is essentially free money that can significantly boost your retirement savings. Understanding the matching contribution structure and ensuring that you contribute enough to receive the full match is a key strategy in maximizing your TSP account’s growth potential. The government portion does not count toward the maximum annual limit but has to be placed in a traditional TSP account. 

Role of Financial Advisor in Making an Investment Decision for Feds

A financial advisor can play a crucial role in helping federal employees make informed investment decisions regarding their TSP accounts. Advisors can provide personalized guidance based on your financial goals, risk tolerance, and retirement timeline. They can also help you understand the implications of different contribution strategies and assist in optimizing your investment portfolio to align with your retirement objectives. Engaging with a financial advisor can provide valuable insights and help you navigate the complexities of retirement planning. Even if you don’t need help with your entire financial plan, investing involves risk and having a financial advisor that is an expert in all aspects of federal employee benefits on your side can make or break a successful retirement from federal service. 

Learn About the Fed-Expert Financial Advisors at PlanWell Financial.  

What Federal Employees Should Consider for Future Retirement Savings

As federal employees plan for their future retirement savings, they should consider several factors, including potential changes in contribution limits, tax implications, and their overall retirement goals. It’s important to regularly review and adjust retirement savings plans to ensure they align with changing financial circumstances and retirement objectives. Employees should also consider diversifying their retirement savings across different types of accounts to optimize tax benefits and manage risk. Staying informed about changes in regulations and seeking professional financial advice can help employees make informed decisions about their retirement savings.