Federal employees and others whose taxable income will exceed $145,000 in 2024 should be prepared to start thinking about how their catch-up contributions will be different. Participants in the Thrift Savings Plan (TSP), 401(k), and 403(b) plans will have to characterize the catch-up contributions in these plans as Roth contributions rather than pre-tax contributions. A TSP Bulletin has already been released for this change.
Under current law, individuals who have reached age 50 and older are permitted to make additional catch-up contributions to retirement accounts. Currently, the catch-up contribution is $7,500. This amount is indexed for inflation.
Starting in 2024, under SECURE 2.0, if a person has an income of at least $145,000 for that year, the catch-up contribution must be treated as a Roth contribution. As a result, of those contributions being made with after-tax dollars, those contributions will not reduce current income. The good news is that the Roth contributions and their earnings can be withdrawn tax-free in the future. The $145,000 income threshold will be indexed for inflation in future years.
Beginning in 2025, a new special catch-up contribution is permitted for taxpayers who are between the ages of 60 and 63. That contribution limit will be equal to the greater of (1) $10,000 or (2) 150% of the standard catch-up contribution limit for 2024. The $10,000 limit will also be indexed for inflation. Once the taxpayer reaches age 64, the regular (lower) catch-up contribution limit applies.
If you are a federal employee and will be over the age of 50 next year and forecast your 2024 income to exceed $145,000, you may wish to consider opening a Roth TSP this year. You can start putting in a few dollars this year and have the Roth account up and running for next year’s catch-up contributions.
By the way, the heirs other than the spouse of high-wage earners benefit from the Roth catch-up. Both Roth and traditional TSP, 401(k), and 403(b) accounts must be liquidated over 10 years by most non-spouse beneficiaries.