Can you contribute too much money towards your retirement? In general, the answer is no, since it’s hard to have too much saved for retirement.” However, you can set aside too much within certain retirement savings instruments and be subject to a tax penalty on the excess amounts, so it pays to be careful.
The good news is that you cannot contribute too much to your Thrift Savings Plan. TSP contributions are made by payroll deduction and, once you hit the elective deferral limit ($18,500 for 2018, with an extra $5,000 allowed once you reach the year in which you attain the age of 50) the TSP will stop your contributions and prevent excess amounts. Keep in mind that the $18,500 limit applies to all your retirement accounts, so if you’re contributing the full $18,500 to the TSP, any contributions you make to another employer sponsored retirement plan would be excess contributions.
There is a 6% penalty for any excess contributions (to either an employer sponsored plan or an IRA) and the penalty continues for each year that the excess contribution remains in the account. If you realize that you made an excess contribution before the filing date of your tax return (generally April 15), you can withdraw the excess contribution and any earnings associated with it and avoid the penalty.
When dealing with IRAs there are several ways that you could end up with excess contributions. First is contributing more than the annual contribution limit; that limit is $5,500 per year, with an extra $1,000 allowed once you reach the year in which you attain the age of 50. You shouldn’t count on your IRA custodian to monitor the amount of your contributions for you, though many of them do. Excess contributions could be an issue if you have more than one IRA, as each individual IRA custodian would only track contributions individually.
A second way to have excess contributions to an IRA is to contribute to a Roth IRA if your income is above the Roth IRA phase out level. Your ability to contribute to a Roth IRA begins to phase out (in 2018) when your Modified Adjusted Gross Income (MAGI) passes $120,000 (single) or $189,000 (joint) and is totally phased out at $135,000 (single) and $199,000 (joint). Your IRA custodian doesn’t know your MAGI, so they wouldn’t know if contributions you made were excess or not. There are no income limits on contributions to the Roth TSP, nor are there any on contributions to a traditional IRA.
There are other ways to make excess contributions to an IRA, though they are more likely to apply to someone who was not still working. One way is contributing when you have insufficient earned income. You must have earned income to contribute to any IRA. Earned income can be easily defined as gross wages or net self-employment income; anything other than that is not considered earned income.
Another is being too old to contribute to a traditional IRA. You are not allowed to contribute at all to a traditional IRA once you enter the year in which you are going to turn 70 ½ – even if you have earned income. You are allowed to continue contributing to your TSP at or past 70 ½ as long as you are still working at your federal job.
Yet another way of making an excess contribution is rolling a required minimum distribution (RMD) into another IRA. You must begin taking RMDs from traditional IRAs starting in the year in which you reach 70 ½ and RMDs cannot be rolled over. In fact, you must take your RMD prior to executing a rollover.
There are other ways to save if you have the ability to fully fund your TSP and IRA. For example, you could fund a taxable account. Because you pay taxes “as you go” in a taxable account, you will not have to worry about any penalties.