Hiccups in Implementing Secure Act 2.0
The Thrift Savings Plan (TSP) recently posted an announcement about catch-up contributions under Secure Act 2.0.
The announcement confirmed catch-up contributions to the TSP that would otherwise be required to go into Roth accounts can now continue to be made on a traditional (pre-tax) basis. The Internal Revenue Service will delay implementing new requirements of Secure Act 2.0—including for the TSP—until January 1, 2026.
Here is why the announcement to forget about some of the previously announced changes in Secure Act 2.0 are being delayed.
Why is There Catch-Up Contribution Confusion?
In August, a FedSmith article noted:
In 2024, employees putting catch-up funds in their TSP (or 401(k) funds) will only go into after-tax Roth accounts for employees who earned more than $145,000 in the previous year. This is a change to the existing rules and is part of the Secure 2.0 Act Congress passed in December.
The reason for the article was changes required by Secure Act 2.0. Under this law, in 2024, employees putting catch-up funds in their TSP (or 401(k) funds) would only be able to put money into a Roth account if a person earned more than $145,000 the previous year. Congress passed the Secure 2.0 Act in December.
Transition Period Announced by IRS
But, a few weeks later, the IRS announced a “transition period” that delayed the new legal requirements for the impacted retirement plans.
The transition period made these changes:
- It implemented a two-year freeze on the rule requiring catch-up contributions by higher-income participants in 401(k) and similar retirement plans (including the TSP) to be designated as after-tax Roth contributions and
- It “clarified” that plan participants age 50 and over could continue to make catch‑up contributions after 2023, regardless of income.
The reason for the delay is that many companies were vocal about their concerns in successfully implementing the changes. The changes would not be quick or easy to implement. Companies would have to integrate a system tracking employee income for the previous year and ensure catch-up contributions would be placed into the Roth accounts—the employee had earned more than $145,000 during the previous year.
The Federal Retirement Thrift Investment Board (FRTIB) would also have had to make the same changes for the TSP to comply as outlined in this article.
The changes in Secure Act 2.0 that have been paused have not gone away—they are only delayed.
This delay may be financially advantageous for some readers. We now know what these changes will be. Some may want to start contributing to a Roth account in advance and be ready to put more into it when the changes are finalized. Others may want to put as much into their current accounts as possible before the changes are made.
Since we now know when these changes will be implemented, readers whom these changes may impact may want to consult a financial advisor. What steps should be taken in light of the delays we know are being implemented? The financial advice may differ depending on the circumstances of each investor.