The Internal Revenue Service (IRS) has announced that federal employees will be able to contribute more to their Thrift Savings Plan (TSP) starting in 2025. This adjustment reflects increases in contribution limits for the TSP and other retirement accounts.
2025 Maximum Contribution Limits
For 2025, the maximum annual contribution limit for TSP accounts will increase to $23,500, a $500 rise from the 2024 limit. This increase also applies to private-sector retirement plans, including 401(k), 403(b), and 457 plans.
Federal employees aged 50 to 59 will continue to benefit from a catch-up contribution limit of $7,500 in 2025. However, those aged 60 to 63 will see an increase in their catch-up contribution limit to $11,250, thanks to provisions in the SECURE Act 2.0, which became law in 2022.
For individuals contributing to Individual Retirement Accounts (IRAs), the 2025 standard contribution limit will remain unchanged at $7,000. The catch-up contribution limit for individuals aged 50 and older will also stay at $1,000.
Should You Consider Building a Roth TSP Balance?
As the new year approaches, individuals nearing retirement may find it an opportune time to explore the benefits of contributing to a Roth TSP. Currently, only about 20% of TSP participants take advantage of Roth TSP contributions, leaving many unaware of its significant benefits.
Roth TSP contributions are made using after-tax income, which means that distributions in retirement are entirely tax-free. Additionally, the Roth TSP combines the tax benefits of a Roth IRA with the TSP’s extensive investment options and lower management fees, providing an attractive option for portfolio diversification.
Unlike a Roth IRA, the Roth TSP imposes no income restrictions. Furthermore, the SECURE Act 2.0 has eliminated Required Minimum Distributions (RMDs) for Roth TSP accounts starting in 2024, enhancing its appeal. For estate planning, a Roth TSP offers additional advantages: while beneficiaries of a traditional TSP balance are responsible for income taxes on withdrawals, distributions from a Roth TSP to named beneficiaries are generally tax-free.
Maximizing Contributions to Secure Your Agency Match
To fully benefit from the TSP agency match, participants must contribute at least 5% of their pay. Failing to do so means forfeiting what is effectively free money. Both Traditional and Roth TSP contributions are eligible for the agency match. However, it is important to note that the matched portion for Roth TSP contributions is deposited into the tax-deferred Traditional TSP account and is subject to taxation upon withdrawal.
Federal employees are encouraged to review their contribution strategies to maximize retirement savings while taking full advantage of available benefits. Reach out to an FRC® trained advisor to ensure you’re maximizing your federal benefits.
