Amidst the dynamic landscape of retirement planning, the SECURE 2.0 Act has emerged as a pivotal legislation, ushering in significant changes to the Thrift Savings Plan (TSP) and shaping the future of retirement savings. Understanding the implications of this legislation is paramount for Federal employees and every community gearing up for retirement.
TSP has published the changes that will take effect in 2024. It was unknown if all changes from SECURE 2.0 would take effect in 2024 as there have been grace and transition periods announced to allow private employers and TSP to establish guidelines and operations. This is an example of the 2-year transition period for the new catch-up rule.
This article will cover each change and its respective time horizon.
Overview of SECURE 2.0 Act
SECURE Act 2.0 is set to improve on the original SECURE Act passed in July 2019. The Setting Every Community Up for Retirement Enhancement Act was designed to increase access to tax-advantaged accounts and to help simplify retirement plan rules.
SECURE 2.0’s stated goal says that it is “to increase retirement savings, simplify and clarify retirement plan rules, and for other purposes.”
There are a lot of big changes that will affect everyone’s retirement so it is important to understand how these changes can impact you. For details, see SECURE 2.0 – Big Changes To Retirement Plans.
Changes Effective Starting 2024
Roth No Longer Subject to RMDs
Beginning in 2024, Roth balances will no longer be subject to required minimum distributions (RMDs). RMD calculations will only include your traditional balance, and only distributions from your traditional balance will count toward satisfying the RMD amount.
If you have a Roth balance in your TSP account, this means your 2024 RMD amount may be less than it would have been.
Important: Calculations for RMDs from spouse-beneficiary participant accounts will still include the entire account balance, and any distribution from a spouse-beneficiary participant account will still count toward satisfying the RMD.
Future Changes Effective Starting 2025 and 2026
Higher Catch-Up Limits at Age 60, 61, 62, and 63
Beginning January 1, 2025, participants age 60, 61, 62, and 63 who are eligible for catch-up contributions will have a higher catch-up limit than participants who are younger or older. For these participants, the IRS catch-up contribution limit increases to the greater of $10,000 (indexed to inflation) or 150% of the regular catch-up limit.
Catch-Up Contributions Must Be Roth If Prior Year’s Income Over Threshold
Beginning in 2026, eligible catch-up contributions must be Roth contributions if your income is above a certain threshold. The IRS wage threshold will be adjusted for inflation and announced by the IRS each year. (When this law passed in 2022, the original wage threshold was set at $145,000 for 2023 wages.) In general, the wages that determine whether this rule applies to you are equal to Medicare wages listed in box 5 of your W-2(s).
Beginning in 2026, if this provision applies to you and your contribution election includes savings to your traditional TSP balance, your contributions will change automatically to all Roth TSP contributions once you meet the annual elective deferral limit (or annual additions limit if making traditional contributions from tax-exempt pay in a combat zone).
Changes Effective Now (Jan. 1, 2023)
Required Minimum Distribution Age Increases
SECURE 2.0 increases the age at which you must begin taking RMDs from your TSP account. The start age for RMDs increased from 72 to 73 starting on January 1, 2023. The start age will further increase to 75 on January 1, 2033.
Reduced Tax Penalty on Missed RMDs
If you don’t take the full amount of your RMD in a given year, you may be subject to an IRS penalty tax (excise tax). SECURE 2.0 reduced that penalty from 50% to 25% of the amount not paid to you on time. It further reduces the penalty to 10% of that amount if you meet the conditions of section 4974(e) of the Internal Revenue Code, and the RMD is timely corrected within two years.
Exemption From 10% Early Withdrawal Penalty for Public Safety Employees
If you’re a qualified public safety employee as defined in 29 U.S.C. 72(t)(B) of the Internal Revenue Code, your distributions will not be subject to the 10% early withdrawal penalty if you’ve separated from service and have 25 years of service under the Plan, even if you haven’t yet reached age 50 when you separate.
Previously, the requirement was that you must have retired after age 50 to take advantage of this rule. Now, the rule expands to those who have separated from service with at least 25 years of service regardless if they have reached age 50.
Substantially Equal Periodic Payments
When a participant meets the requirements for an exception to the 10% early withdrawal penalty by receiving substantially equal periodic payments, the exception will continue to apply in the case of a rollover of the account (if payments continue) or an annuity purchase that satisfies the required minimum distribution rules.
Roth Funds to SIMPLE and SEP IRAs
SECURE 2.0 allows Roth contributions to SIMPLE (Savings Incentive Match Plan for Employees) IRAs and SEPs (simplified employee pension plans). This means that you can roll over money from your Roth TSP balance to these types of plans.
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