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Federal Employees 50 and Older Are Encouraged to Make TSP "Catch-Up" Contributions
Edward A. Zurndorfer, Certified Financial Planner
"Catch-up" contributions are supplemental tax deductible
contributions that federal employees age 50 and older (or turning age 50 during the
calendar year) can make to the Thrift Savings Plan (TSP).
"Catch-up" contributions are an addition to the maximum
amount that employees can contribute through regular contributions. During 2010,
all federal employees (CSRS and FERS) may contribute a maximum $16,500 in
"regular" contributions and $5,500 in "catch-up" contributions.
In order to make "catch-up" contributions, an
employee must be:
• age 50 or older during the calendar year in which the
catch-up contributions are made. This is the case no matter what time of the
year the employee becomes age 50. For calendar year 2010, this means that
employees born on or before Dec. 31, 1960, are eligible to make catch-up
contributions throughout 2010;
• currently employed and in pay status; and
• making regular contributions to a civilian or uniformed
services TSP account or both, and/or equivalent employer plan such as a 401(k),
403(b) or 408 plan, that will equal the maximum allowed by the IRS (the
"elective deferral limit") which is $16,500 for 2010.
"Catch-up" contributions are supplemental and do not
count against the IRS' elective deferral limit of $16,500 during 2010. This
means that the combination of regular and "catch-up" contributions cannot exceed
$22,000, which includes the $16,500 elective deferral limit plus the $5,500
"catch-up" contribution limit.
Those employees 50 and older who have made a hardship
withdrawal from the TSP are ineligible to make "catch-up" contributions within
six months of their making a hardship withdrawal.
"Catch-up" contributions can be made only via a deduction
from an employee's gross pay. Bonuses or special/incentive pay (applicable to
members of the uniformed services) cannot be used for "catch-up" contributions.
"Catch-up" contributions apply to the year in which the
employee made the contribution -- even if the contributions are posted to the
account in the following year. This means that if a retiring employee's last pay
date is in December and he or she has reached the maximum contribution limit for
the year ending Dec. 31, then no "catch-up" contribution may be made from the
employee's last paycheck. This is true even if the check is dated sometime in
January.
Consider the following example.
Ellen intends to retire from federal service on Dec.
31, 2010 at which time she will be 57 years old. During 2010, Ellen intends to
contribute the maximum $16,500 regular contributions and $5,500 "catch-up"
contribution to her TSP account. Ellen will not be able to elect to any of her
final paycheck contributed to the TSP. This is because even though she is
retiring Dec. 31, 2010 and her final paycheck will be dated in January 2011,
Ellen would have reached the maximum $22,000 TSP contribution limit by the time
she retires on December 31.
"Catch-up" contributions may only be made through payroll
deductions and are made prior to federal and in most cases, state tax
deductions. Employees must submit to their agency or service branch a Catch-Up
Contribution Election Form TSP-1-C, or Form U-1-C for members of the uniformed
services. The employee or uniform service member must include the dollar amount
- not a percentage of gross pay - to be deducted from their gross pay. The
employee or service member must also certify that the employee or service member
expects to contribute the maximum amount of regular contributions for the
calendar year. If an agency or service branch uses an electronic version of the
form, such as Employee Express, PostalEase, EBIS or MyPay, then the employee may
be required to submit his or her election electronically.
A "catch-up" contribution election can be made anytime
during the year. An election becomes effective the first full pay period after
the employee's agency receives the employee's election request. The election
will only be valid through the end of the calendar year in which it is made.
This means that employees will have to submit a new Catch-Up Contribution
Election form each year.
When the TSP receives an employee's catch-up
contributions, it will post the contributions upon receipt and allocate it to
the employee's account according to the employee's current contribution
allocation. An employee cannot make a separate contribution election for
"catch-up" contributions. Once the "catch-up" contributions are posted to an
employee's TSP account, they become part of the employee's account balance and
are subject to the same rules as other tax-deductible and tax-deferred employee
contributions. The employee is immediately vested in these contributions.
An interfund transfer has the same effect on "catch-up"
contributions as on the rest of the money in the employee's account. The
contributions are available for loans and withdrawals and spouses' rights also
apply with respect to withdrawals.
Employees can start, change or stop making "catch-up"
contributions at any time during the year. To start, request a change, or to
stop making "catch-up" contributions, employees have to submit Form TSP-1-C or
make their request via their agencies' electronic enrollment process. Once
"catch-up" contributions are stopped, they will not resume automatically. The
employee must complete and submit another Form TSP-1-C in order to restart the
contribution process. This can also be done electronically.
"Catch-up" contributions are reported like regular TSP
contributions to the IRS on an employee's Form W-2, Wages and Tax
Statement.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in
Silver Spring, MD. He is a seminar speaker at federal employee retirement
seminars throughout the country for the National Institute of Transition
Planning, Inc. , and an author of numerous publications on federal employee
benefits.
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