The Thrift Savings Plan (TSP) is a Defined Contribution retirement investment plan sponsored by the Federal government for the sole benefit of its employees. It is authorized under section 401(a) of the Internal Revenue Code.
For 2016, the employee elective deferral limit is $18,000 or $24,000 if age 50+. At the employee’s option these salary deferrals are designated as traditional (pre-tax) or Roth (after-tax) contributions. The combined total may not exceed $18,000/$24,000.
The Super Saver Strategy for Retirement Savers
Did you know that Internal Revenue Code section 415© authorizes much higher contribution limits? For 2016, the “annual additions limit” is $53,000 which includes contributions from all sources.
Example: Fred is 25 years of age and earns $85,000 a year. He contributes his maximum elective salary deferral of $18,000 to his Roth TSP (after tax) account and his agency contributes $1,000 on his behalf.
Q.: How much more can Fred contribute?
A.: $53,000–$19,000 or $34,000. Inasmuch as Fred has maxed out his elective salary deferral at $18,000 for 2016, the $34,000 of additional contributions will be designated as after-tax contributions. Following is Fred’s contributions for 2016.
| Employee elective salary deferral | $18,000 |
| Employee after-tax contribution | $34,000 |
| Employer contribution | $1,000 |
| Total | $53,000 |
What Needs To Be Done Before This Super Saver Strategy Becomes A Reality?
Unfortunately, this “super saver” option is not currently available for TSP participants. As noted above, it is a highly beneficial savings strategy for retirement and hopefully one the TSP will consider adding.
Here is what must happen in order for this to be added to the TSP:
- The Federal Retirement Thrift Investment Board (the Board) must amend the Plan Document to allow for a third contribution type: after-tax contributions.
After-tax contributions can easily be confused with Roth contributions, as both types of contributions are made on an after-tax basis. The major difference is that for Roth contributions, once taxes are paid on the contribution, the earnings are never subject to tax assuming the account has been opened for five years. Conversely, with after-tax contributions, the earnings accumulate on a tax-deferred basis but the earnings are subject to tax when withdrawn.
- Additionally, to gain the full benefit of converting after-tax contributions to a Roth IRA, the Board must also amend the Plan Document to allow for in-service withdrawals prior to 59 ½.
Fred would then effectuate annual direct conversions of his TSP after-tax contributions to his Roth IRA. If Fred must wait until retirement/severance to convert his after-tax contributions to a Roth IRA he will have much less time to grow his Roth IRA where it’s not subject to Required Minimum Distributions (RMD) and withdrawals are not subject to tax.
Of Note: For 2016 Fred contributes $5,500, the maximum allowed, to his Roth IRA. With the conversion of his TSP after-tax contributions of $34,000 Fred has, effectively, contributed $39,500 to his Roth IRA. Meet Fred, the super saver!
Proposal
The TSP should also administer an IRA Program. Let’s name it: The Federal Employee IRA (FE IRA). This will be the IRA of choice and, thus, the only one utilized by TSP participants. The FE IRA will be used to consolidate (rollover) retirement accounts from outside sources such as other IRA, 401(k), 457(b) and 403(b) accounts. The FE IRA investment menu will be the same as the TSP. The FE IRA (traditional and Roth) will also be used for annual IRA contributions as well as for the rollover/conversion transactions enumerated in this article.
The Deferred Compensation 457(b) and 401(k) Plans of the City of New York also administers the New York City Employee IRA.
Joel L. Frank is a retired New York City high school teacher of accounting.
