Managing Money

Catch-up Contributions

Beginning in 2021, the Thrift Savings Plan (TSP) introduced a simplified process for eligible participants wishing to make catch-up contributions. Now, rather than requiring a separate election, eligible participants need only make one election for both regular and catch-up contributions.

First introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), catch-up contributions give older participants the opportunity to save more money each year to make up for earlier times when circumstances may not have allowed them to save the maximum each year. For 2021, the annual TSP limit for regular contributions is $19,500; participants age 50 and older may make the additional catch-up contribution of $6,500, bringing their total contribution limit to $26,000.

Prior to this year, a TSP participant wishing to make catch-up contributions did so through a separate election in addition to the regular contribution election. Before being permitted to elect catch-up contributions, however, a participant must have already been contributing enough in regular contributions to reach the IRS annual contribution limit. Now, eligible participants may simply make one contribution election, and when their contributions reach the IRS annual limit for regular contributions ($19,500 for 2021), additional contributions automatically spill over and count towards the catch-up limit.

Not all participants will find the new system easier. Some participants prefer to front-load their catch-up contributions, rather than spreading them evenly over all pay periods, under the assumption that front-loading

contributions and reaching the annual limit in as few pay periods as possible may lead to greater growth over time. While it will still be possible to accomplish the same result, participants who wish to front-load contributions will have to work a little harder or else risk missing out on some agency matching contributions.

For example, under the old system, participants wishing to front-load their catch-up contributions over 10 pay periods while spreading out their regular contributions to ensure they receive the maximum agency match would have elected regular contributions at $750 per pay period (based on a biweekly pay schedule) and catch-up contributions at $650 per pay period. In this case, the catch-up contributions would automatically stop when the limit was reached after the tenth pay period, while the regular contributions would continue for the full 26 pay periods.

Under this old system, catch-up contributions were not eligible for agency matching contributions, so a participant was free to frontload contributions and reach the annual catch-up limit as quickly as possible. Participants could easily contribute whatever amount they could afford to get the catch-up contributions in as quickly as possible while spreading out regular contributions over all 26 pay periods to receive the maximum possible agency matching contribution.

Under the new, single contribution system, participants won’t technically be front-loading catch-up contributions (since they don’t start until the annual limit for regular contributions has been reached); however, participants may still achieve the same end result by starting each year off with larger contributions for the desired number of pay

PRIOR TO THIS YEAR, A TSP PARTICIPANT WISHING TO MAKE CATCH-UP CONTRIBUTIONS DID SO THROUGH A SEPARATE ELECTION IN ADDITION TO THE REGULAR CONTRIBUTION ELECTION.

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periods, followed by smaller contributions over the remaining pay periods.

To draw on the previous example, under the new rules, TSP participants would start the year off with a single contribution of $1,400 per pay period instead of two separate elections (the $750 regular contribution and $650 catch up). After the tenth pay period when the desired front-loaded contribution is reached, participants would then have to reduce the contribution to $750.

While this method isn’t technically front-loading catch-up contributions, the effect is the same. Under the new system, catch-up contributions are eligible for agency matching contributions, so in reality, participants may front-load whatever amount he or she desires just as long contributions never fall below 5 percent of salary during any pay period. Otherwise, participants would miss out on some agency matching.

Although not overly complicated, it does take a little more work to front-load contributions. This begs the question, is it worth the trouble? Stay tuned, as next month I’ll compare various contribution scenarios and their potential outcomes based on historical TSP fund returns.

MARK A. KEEN, CFP®, IS PARTNER, KEEN & POCOCK, AND AN INVESTMENT ADVISER REPRESENTATIVE AND REGISTERED PRINCIPAL OF THE STRATEGIC FINANCIAL ALLIANCE, INC. (SFA). SECURITIES AND ADVISORY SERVICES ARE OFFERED THROUGH SFA.

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