You don’t have to wait until your 50th birthday to start putting an extra $7,500 in your Thrift Savings Plan (TSP). The year of your 50th birthday allows you to start the first pay period with Catch-Up contributions. For 2024, that means with the annual elective deferral limit of $23,000 you can salt away a total of $30,500 toward your retirement.
But why do we have the Catch-Up contributions?
The Internal Revenue Service in 1981, issued new rules that allowed employees to fund their 401(k) through payroll deductions. Then twenty years later, the Economic Growth and Tax Relief Reconciliation Act changed the game for those age 50 and older by adding Catch-Up contributions to help them make larger contributions to build up their retirement balance. The TSP was designed on the 401(k) model and shares many similarities with that defined contribution plan.
The good news for those of you approaching the big 50 milestone is that you have a very easy way to contribute your Catch-Up contributions compared to us old-timers. Starting in 2021, the TSP introduced the “spillover” method for the TSP Catch-Up contributions. No longer do you have to make a separate TSP Catch-Up election each year. The spillover method eliminated the requirement for participants to make the annual election.
Now you just add the extra contributions for turning age 50 along with your other TSP contributions. If that sounds too easy and you want a further understanding of the process, then read Introduction of the Spillover Method for Catch-Up Contributions to the Thrift Savings Plan.
Here is how someone who would have turned age 50 in 2024 could have used the spillover method to optimize their matching contributions. Before the first pay period in 2024, she or he would have previewed how many pay periods would occur in 2024. Depending on the calendar year, there are sometimes 27 pay periods, which can increase payroll costs. There are 26 pay periods in 2024.
So, for 2024, a person would divide $30,500 by 26 to get $1,173.07. This is the amount that would maximize the combined contribution of the elective deferral limit and the Catch-Up contributions to ensure you get matching contributions throughout the entire year.
What if you turn 50 this year and have not yet started your Catch-Up contributions? You don’t have to start your Catch-Up contributions with the first pay period of the year. The TSP even has an onsite calculator to assist you.
The Catch-Up contribution is also an opportunity to explore thinking of having your TSP contributions divided between the Traditional and Roth investment options. If you have a tax preparer or investment advisor, he or she can review your taxable income along with your current tax bracket as a consideration to find the best blend of the Traditional and Roth TSP.
If you are age 49 this year, go to your December calendar and pen yourself a note for the Catch-Up in 2025. That way you will be ready to take advantage of the extra Catch-Up contributions with the first pay period of the new year.
