The standard dollar limit on investments in the TSP, the “elective deferral limit,” will be unchanged in 2021 at $19,500, while the “catch-up contribution” limit also will remain at its current amount of $6,500.
In both cases the figures involve personal investments only and don’t include government contributions for those under FERS or any transfers into the TSP from retirement savings accounts from prior employers. For those investing in both the traditional (tax-free on investment, taxable on withdrawal) and Roth (after-tax on investment, tax-free on withdrawal so long as certain conditions are met), each limit applies to the combined total of both types.
The catch-up figure is an additional investment above the standard amount allowed for investors who are at least age 50 during the year. Effective in calendar year 2021 no separate election will necessary; for those eligible to make catch-up contributions, any investments beyond the standard limit will “spill over”—they will be automatically designated as catch-up contributions, up to that second limit.
Also effective in calendar year 2021 is a new policy regarding one form of post-separation withdrawal, installment payments based on life expectancy (which like dollar-amount installments can be taken monthly, quarterly or annually). Under prior rules, anyone stopping such payments could not later elect to restart such payments. Under the new policy they may.
The TSP has said that many separated TSP participants those payments in order to satisfy the requirement to take certain minimum distributions after age 72. However, under the prior policy, if their accounts suffer investment losses, they were forced to either continue to receive payments and forego the chance to let their account balances recover, or stop their payments and forego the ability to restart such payments in the future, it said.
The “required minimum distribution” rule was suspended for 2020 but resumes in 2021. Also, several liberalized loan and in-service withdrawal policies also enacted earlier this year in response to the pandemic have expired.
The G Fund is Underperforming Inflation
If TSP investors leave money in the G Fund, it is guaranteed not to lose money nominally, but slowly chips away at purchasing power at current rates. On the other hand, if they invest heavily in the equity funds, they have more upside exposure, but also a lot more volatility risk.
TSP: Stocks and The Economy Diverge
As many folks know by now, this has been an unusual year for most asset prices. Despite the biggest economic shock in modern history, stock indices have hit fresh all-time highs in 2020, partially due to large government stimulus and a rapid expansion of the money supply.