As we approach 2024, understanding the Thrift Savings Plan (TSP) contribution limits is crucial for maximizing your retirement savings. The TSP is a defined-contribution plan available to federal employees and military personnel, offering tax advantages and a variety of investment options. With each new year, the contribution limits are updated to reflect changes in inflation and tax policy. In this article, we’ll break down the TSP contribution limits for 2024, explain the various types of contributions, and explore strategies to make the most of your savings.
What Is the TSP?
The Thrift Savings Plan (TSP) is a retirement savings plan that mirrors the 401(k) plans offered in the private sector. It is available to employees of the U.S. federal government, including the military, and provides both tax-deferred and Roth contributions options. The TSP is considered one of the best retirement savings vehicles due to its low costs and diverse investment choices.
There are two main types of contributions you can make to your TSP:
- Traditional Contributions: These are made with pre-tax income, meaning you won’t pay taxes on the money until you withdraw it during retirement.
- Roth Contributions: These are made with after-tax income, meaning the contributions are taxed upfront, but you won’t pay taxes on withdrawals in retirement if certain conditions are met.
Both options offer unique advantages, and understanding the contribution limits for 2024 will help you determine how much to allocate to each.
2024 TSP Contribution Limits: An Overview
For 2024, the TSP contribution limit will remain in line with IRS regulations for employer-sponsored retirement plans, including 401(k)s. The key limits to be aware of are:
- Elective Deferral Limit: This is the maximum amount of your salary that you can contribute to the TSP in a calendar year. For 2024, the elective deferral limit is expected to be $22,500, up from $22,000 in 2023.
- Catch-Up Contribution Limit: If you are 50 years of age or older, you can make additional “catch-up” contributions. For 2024, the catch-up contribution limit is expected to be $7,500, bringing the total possible contribution to $30,000 for those eligible.
- Annual Addition Limit: This includes both your contributions and any agency or employer contributions. The limit for 2024 is $66,000 (up from $66,000 in 2023).
It’s important to note that the annual addition limit includes any contributions made to other retirement accounts, such as a 401(k) or 403(b), so be mindful of how you allocate your retirement savings across multiple accounts.
Employer Matching Contributions
One of the most significant benefits of the TSP is the matching contributions offered by your employer. If you’re a Federal Employees Retirement System (FERS) participant, your employer will match up to 5% of your contributions. Here’s how it breaks down:
- 1% automatic contribution: Even if you don’t contribute anything, your employer will contribute 1% of your salary to your TSP account.
- Dollar-for-dollar match: Your employer will match 100% of the first 3% of your contributions.
- 50% match: Your employer will match 50% of the next 2% of your contributions.
Maximizing these matching contributions is essential. If you contribute at least 5% of your salary, you’ll receive the full employer match, effectively increasing your retirement savings without any additional effort on your part.
Types of Contributions
In 2024, you’ll continue to have the option to make two types of contributions to your TSP account: Traditional (pre-tax) and Roth (after-tax).
Traditional Contributions
- Tax-deferred growth: Traditional contributions are made with pre-tax dollars, which reduces your taxable income in the year you make the contribution. Your money grows tax-deferred, and you only pay taxes when you withdraw it in retirement.
- Lower taxable income: By contributing to a traditional TSP account, you lower your taxable income in the current year. This can be particularly advantageous if you’re in a higher tax bracket during your working years.
Roth Contributions
- Tax-free withdrawals: Roth contributions are made with after-tax dollars, so you won’t pay taxes on qualified withdrawals during retirement. This can be especially beneficial if you expect to be in a higher tax bracket when you retire.
- Flexibility: The Roth TSP offers flexibility, allowing you to diversify your tax strategy in retirement. By having both traditional and Roth contributions, you can manage your withdrawals to minimize taxes.
Understanding the IRS Contribution Limits
The IRS sets contribution limits for employer-sponsored retirement plans, including the TSP, to prevent high-income individuals from gaining disproportionate tax benefits. These limits are subject to annual adjustments based on inflation, so it’s essential to stay informed of any changes for the upcoming year.
Elective Deferral Limit
The elective deferral limit is the amount you can contribute from your salary to your TSP account. For 2024, this limit is expected to be $22,500. If you’re under 50, this is the maximum amount you can contribute to your TSP account on a tax-deferred basis.
Catch-Up Contributions
If you’re 50 or older, you can make catch-up contributions in addition to the regular elective deferral limit. For 2024, the catch-up contribution limit is expected to be $7,500, allowing for a total contribution of $30,000 if you’re eligible.
Annual Addition Limit
The annual addition limit is the total amount that can be contributed to your TSP account from all sources, including your contributions, employer matching contributions, and any agency automatic contributions. For 2024, the annual addition limit is expected to be $66,000.
Maximizing Your TSP Contributions
To make the most of your TSP contributions in 2024, consider the following strategies:
Contribute the Maximum Allowable Amount
By contributing the maximum allowable amount to your TSP, you can take full advantage of the tax benefits and employer matching contributions. This means aiming to contribute $22,500 (or $30,000 if you’re eligible for catch-up contributions) throughout the year.
Leverage Roth and Traditional Contributions
A combination of both Roth and traditional contributions can provide you with tax flexibility in retirement. You can strategically plan to have both tax-free and taxable withdrawals, depending on your retirement needs.
Start Early in the Year
By starting your contributions early in the year, you can take advantage of compounding over a longer period. Even if you can’t contribute the maximum amount, starting your contributions as soon as possible will allow your investments to grow faster.
Investment Options in the TSP
The TSP offers five individual investment funds, each with different risk and return characteristics:
- G Fund (Government Securities Investment Fund): Low risk, guaranteed returns.
- F Fund (Fixed Income Index Investment Fund): Bonds and other fixed-income securities.
- C Fund (Common Stock Index Investment Fund): Tracks the performance of the S&P 500.
- S Fund (Small Cap Stock Index Investment Fund): Tracks U.S. small and medium-sized companies.
- I Fund (International Stock Index Investment Fund): Tracks international stocks.
Additionally, there are Lifecycle (L) Funds, which automatically adjust your asset allocation based on your target retirement date.
TSP Withdrawal Rules
When it comes time to withdraw money from your TSP, you’ll need to decide how you want to structure your withdrawals. The TSP offers several options:
- Partial withdrawals: You can take out a portion of your TSP balance and leave the rest invested.
- Full withdrawals: You can take out your entire balance at once or over time.
- Monthly payments: You can choose to receive monthly payments from your TSP account, either a fixed amount or based on your life expectancy.
It’s important to remember that withdrawals from traditional TSP accounts are subject to income tax, while Roth TSP withdrawals are tax-free as long as you meet the eligibility requirements.
Tax Implications of TSP Contributions
Contributions to a traditional TSP account are made with pre-tax dollars, which reduces your taxable income in the year of the contribution. However, you’ll owe taxes on the money when you withdraw it in retirement. If you anticipate being in a lower tax bracket during retirement, this can be a significant advantage.
Contributions to a Roth TSP are made with after-tax dollars, so there’s no immediate tax benefit. However, the primary advantage comes in retirement when qualified withdrawals are entirely tax-free.
Conclusion: The Importance of Contributing to Your TSP in 2024
Maximizing your TSP contributions in 2024 is one of the most effective ways to ensure a financially secure retirement. By contributing the maximum allowable amount, taking advantage of employer matching contributions, and strategically utilizing both traditional and Roth accounts, you can set yourself up for long-term financial success.
With the TSP contribution limits set to increase in 2024, now is the perfect time to evaluate your retirement strategy and ensure you’re making the most of this valuable retirement savings plan. Take the time to review your contribution levels, diversify your investments, and consult with a financial advisor.
