Buying time: This year the limit on additional “catch-up” investments is $7,500. Image: pogonici/Shutterstock.com
The TSP has sent out its first guidance on changes starting next year to the “catch-up contribution” policies that will apply in program as well as to other similar retirement savings programs.
Catch-up contributions are additional investments that actively employed investors who are at least age 50—or who will be before the end of a year—may make above the standard maximum allowed. This year, the standard maximum is $22,500 and the limit on additional “catch-up” investments is $7,500. Those figures may change for 2024.
Prominent among the changes in the “Secure 2.0 Act” enacted late last year is that starting in 2024 investors whose earnings are above a threshold—which will be $145,000 in 2023 income—catch-up investments must be made into “Roth” balances (investments made after tax but withdrawn tax-free)—with investing in a “traditional” balance (investments made pre-tax but taxable on withdrawal) no longer available to them. The earnings threshold is expected to be adjusted annually for inflation in future years, as well.
Key points of the guidance include:
· The change applies only to wages earned “in the preceding calendar year from the employer sponsoring the plan.” For someone who worked for more than one federal agency during the year, earnings from each will be added together. However, for someone who worked in the private sector or worked another job in addition to their federal employment during the year, only earnings through their federal employment will be considered.
· Those eligible to make catch-up investments whose wages were at or below the prior year’s threshold will continue to be free to make such investments on either a traditional or a Roth basis.
· This fall, the TSP will send notices to all actively employed account holders who will be age 50 or older in 2024 informing them of the new policy. Starting in February and every year after, it will send a notice to all active investors who will be 50 or older in that year and whose prior year wages were above the threshold.
· The TSP will continue using the “spill-over” policy in which investments above the standard limit continue and automatically become catch-up investments, for those eligible. However, for employees subject to the earnings threshold, agencies must designate the catch-up investments as Roth status “regardless of what the participant may have elected (traditional, Roth, or both) for any contributions up to the elective deferral limit.”
· The TSP will reject any catch-up investment in traditional style for a participant whose prior year’s earnings were greater than the threshold. It will then notify the employee’s payroll office, which will be responsible for resubmitting the rejected amount as a Roth investment.
The TSP’s notice also instructs agencies on their obligations to report earnings data to the TSP and other technical matters.
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