The Thrift Savings Plan Enhancement Act of 2009, Public Law 111-31, signed into law on June 22, 2009, authorized the Thrift Savings Plan (TSP) to add a Roth 401(k) feature to the plan. This allows participants to contribute on an after-tax basis to their TSP accounts and receive tax-free earnings when the funds are withdrawn. Note that this is a Roth 401(k) not a Roth IRA which means there are no exclusions based on income.
Basic Concept of Roth
Roth contributions are made on an after-tax basis from basic pay. They may be made in combination with or in lieu of traditional tax-deferred contributions, they are subject to the elective deferral limit and must be combined with any regular contributions in determining whether the limit has been met ($22,500 elective deferral for 2023).
Participants age 50 and over may elect to make Roth catch-up contributions. All regular catch-up contributions and Roth catch-up contributions ($7,500 for 2023) are contributed from basic pay and count against the catch-up deferral limit.
Agency Automatic (1%) and Agency Matching Contributions:
- Are always tax-deferred (as are their earnings). There is no differentiation between matching contributions associated with regular contributions and those associated with Roth contributions.
- Agency Automatic (1%) Contributions are not affected by a participant’s election to make Roth contributions.
- Roth contributions are added to regular contributions when determining the percentage of pay being contributed for purposes of the Agency Matching Contribution formula. Thus, the total amount of employee contributions (whether regular or Roth) is used for the formula.
Elective Deferral Limit
- Like regular contributions, Roth contributions are considered elective deferrals and are subject to the IRC § 402(g) elective deferral limit.
- Thus, all employee contributions, whether regular or Roth, are added together to determine if the elective deferral has been reached.
Age 50 and over catch-up contribution limit (IRC § 414(v)). All catch-up contributions, whether regular or Roth, are added together to determine if the IRC’s catch-up contribution limit has been reached.
The maximum that a participant (who is age 50 or older) can contribute is the sum of the elective deferral and catch-up contributions limits. Thus, if the IRC elective deferral limit is $22,500 (for 2023) and the catch-up limit is $7,500 (for 2023), a TSP participant may contribute:
- Up to $22,500 in combined regular and Roth contributions;
- If age 50 or older, up to $7,500 in combined regular and Roth catch-up contributions;
- For a combined total of up to $30,000 for 2023.
Election Rules
The same rules apply to Roth contributions as to regular contribution elections. Thus,
- A participant may designate any whole percentage or whole dollar amount of basic pay as Roth contributions.* This election may be in addition to or in lieu of an election to make regular (tax-deferred) contributions.
- For example, a participant could elect to contribute 5% of basic pay as a Roth contribution and $25.00 as a regular TSP contribution (or vice versa).
- A participant who is age 50 or older may elect a whole dollar amount of basic pay as Roth catch-up contributions in addition to or in lieu of regular catch-up contributions. The participant will continue to be required to certify that he or she expects to reach the elective deferral (402(g)) limit for the year.
- At present, the law does not allow conversions of existing TSP regular balances to Roth balances.** If a participant elects to contribute a regular (tax-deferred) contribution to the TSP, he or she may not request that the contribution be changed to a Roth contribution (or vice versa) once the election is properly processed by the agency and the contribution is deposited into his or her TSP account. (The participant can always change his or her election for future contributions.)
- If an agency determines, under the TSP error correction regulations, that it incorrectly submitted contributions as Roth and they should have been regular (or vice versa), then it may request the “redesignation” of those contributions without removing the contributions from the participant’s TSP account.
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* Because the catch-up contribution process is basically the same as the regular contributions process, catch-up contributions are incorporated by inference. Therefore, catch-up contributions are discussed only as they are distinguished from regular contributions (e.g., the contribution limit) or for specific emphasis (e.g., when all employee contributions must stop as a result of a financial hardship). ** The law does allow separated participants and participants who are over age 59½ to withdraw TSP regular balances and transfer them to a Roth account (e.g., a Roth IRA). These participants must pay tax on the amount transferred for the year of the transfer. This feature has been available to TSP participants since February 2008.