2023 Thrift Savings Plan Strategies Federal Employees Should Consider

The month of December is in general an important time of year for Thrift Savings Plan (TSP) participants. During December, most federal employees have their last opportunity to contribute to the TSP for the current year. In early to mid-December employees are encouraged to decide how much they want to contribute to the TSP for the next year.

December 2022 is especially important for TSP participants because:

(1) Many federal employees will be retiring on December 31, 2022 and with the end of 2022 retirement comes their last opportunity to contribute to the TSP; and

(2) The TSP contribution limits will significantly increase starting January 1, 2023.

The 2022 elective deferral contribution limit of $20,500 (applicable to all federal employees no matter their age) increases to $22,500. For employees aged 50 and older, the catch-up contribution increases from $6,500 during 2022 to $7,500 during 2023.

This means that employees aged 50 and older during 2023 can contribute a maximum $30,000 to the TSP, a $3,000 increase from the $27,000 contribution limit for employees over age 50 during 2022.

Considerations for 2022 TSP Contributions

During 2022, all employees can contribute a maximum $20,500 to the TSP. Those employees who will be over age 49 as of December 31,2022, and were born before Jan. 1, 1973, can contribute an additional $6,500 in catch-up contributions for a total of $27,000.

The last day an employee can contribute to the TSP for 2022 is their final pay date in December 2022. This final pay date will be sometime between December 19 and December 30, 2022.

Note that at most federal agencies pay period 26 for leave year 2022 will end December 31, 2022. January 1, 2023 is the start of the 2023 leave year for mot federal agencies.

Those employees who reached their TSP contribution limit before or during pay period 26 of leave year 2022 will be able to contribute to the TSP for pay period 26. This is because employees will get paid for working pay period 26 sometime in early January 2023. Their first pay date in January 2023 will also be the first day during 2023 in which they can contribute to the TSP.

This is important for employees who will be retiring Dec. 31, 2022. Once retired, they can no longer contribute to the TSP. But they can contribute to the TSP for 2023 via their last paycheck for pay period 26 of pay period 2022.

The following example illustrates:

Example 1. Frank, age 62, will be retiring on December 31,2022 after 30 years of federal service under FERS. His last pay period will be pay period 26 for leave year 2022. During that period, his gross salary will be $6,000. After subtracting mandatory deductions (FERS retirement contribution of 0.8 percent of$4), health insurance premium of $105, Social Security (FICA) taxes of $372,

Medicare Hospital Insurance Tax of $87 and FEGLI life insurance premium of $15. Frank’s net paycheck will be $5,373. He elects to contribute the $5,373 net salary into his traditional TSP account. This is Frank’s last contribution to the TSP. His agency will contribute and automatic one percent of his $6,000 gross salary, or $60, and matching contribution of four percent of $6,000, or $240, for a total agency contribution on Frank’s behalf of $300.

Which TSP Account to Contribute During December 2022 – Traditional or Roth?

Employees can contribute to the traditional TSP, to the Roth TSP, or to both accounts. The traditional TSP is the before-taxed TSP account in which contributions are deducted from an employee’s before-taxed salary (before federal and state income taxes are withheld, except for employees who live in New Jersey and Pennsylvania) each pay period, and any earnings in the account grow tax-deferred. The result of traditional TSP contributions are current year tax savings and tax-deferred growth. Fully traditional TSP withdrawals are then fully taxable at least at the federal level.

Employees can also contribute to the Roth TSP in which contributions are deducted from an employee’s after-taxed salary (after federal and state income taxes are withheld) each pay period. The advantage of the Roth TSP is that the account accrues earnings over time and when an employee makes qualified withdrawals from his or her Roth TSP account after the employee has reached age 59.5, the withdrawals are fully federal and state income tax-free.

Employees who, as of early December 2022 have not contributed the maximum possible for 2022 are encouraged to evaluate their year-to-date 2022 federal and state income liability status. If they determine that they anticipate owing a relatively large amount of federal income taxes (more than $1,000 and potentially subject to an under withholding penalty), they should contribute as much as possible to the traditional TSP for the rest of December 2022.

Contributing to the traditional TSP (using before-taxed salary) reduces federal and state income tax liabilities. On the other hand, if an employee is expecting a large refund (say more than $1,000) when they file their 2022 income taxes in spring 2023, they should contribute as much as possible to the Roth TSP during the rest of December.

The following two examples illustrate:

Example 2. Robert, age 52, has contributed a total of $25,000 to the TSP for 2022 as of December 7. He has one remaining pay date left in December. Robert is in a 24 percent federal marginal tax bracket and has determined that he will owe $1,200 in federal income taxes when he files his 2021 federal income tax return in spring 2022. If Robert contributes the maximum $2,000 (up to $27,000) he is eligible to contribute to the TSP for 2022, he will save 24 percent of $2,000, or $480 of federal income taxes when he files his 2022 income tax return. His anticipated 2022 $1,200 federal income tax liability will then be reduced by $480 to $1,200 less $480, or $720. Since Robert will owe less than $1,000 when he files his 2022 federal income tax, he will likely not be subject to an IRS under withholding penalty.

Example 3. Julie, age 55, has contributed a total of $25,000 to the TSP for 2022 as of December 7. She has one remaining pay date left in December. Julie is in a 22 percent federal marginal tax bracket and has determined that based on her taxable income for 2022 and year-to-date federal income tax withholdings, she will be due for an approximate $1,500 to $2,000 refund when she files her 2022 federal income taxes in spring 2023. Julie should consider contributing an additional $2,000 to her Roth TSP While the $2,000 Roth TSP contribution will decrease Julie’s federal tax refund for 2022, the $2,000 Roth TSP contribution together with accrued earnings can be withdrawn income tax-free after Julie becomes age 59.5.

TSP Considerations for Annuitants Who Become Age 72 During 2022

Those CSRS and FERS annuitants who became 72 during 2022 are required to take their first TSP required minimum distribution (RMD) no later than April 1, 2023. Although they can take their first TSP 2022 RMD in January, February or March 2023, they are encouraged to take their first RMD before December 31,2022. If they wait until the first three months of 2023 to take their 2022 RMD, they will then have to take another TSP RMD for the year 2023 before December 31,2023. In other words, two RMDs in the same calendar year, both of which are fully taxable, may result in additional federal and state tax liabilities for the year 2023. By taking the 2022 TSP RMD before December 31,2022, they can spread the tax liabilities resulting from the two RMDs over two years.

TSP Considerations for Employees Who Will Become Age 72 During 2023

Those employees who will become age 72 anytime during 2023 and who were born between January 1 and December 31,1951, and who plan to continue in federal service throughout 2023, will not be required to take their TSP RMD before April 1, 2024. This is because they are continuing to stay in federal service during 2023.

However, if any employee becoming age 72 during 2023 owns a traditional IRA or a qualified retirement plan (401(k) or 403(b) plan or a SEP IRA or a SIMPLE IRA that they previously participated in) RMDs must be also taken from each of these plans and IRAs, even if the employee remains in federal service during 2023. A way to avoid these RMDs is for the employee to transfer their entire IRA or qualified retirement account into their traditional TSP account. They can do so by downloading TSP Form TSP-60 (Request for a Transfer into the TSP (downloadable  here) and request a direct transfer into their traditional TSP account.

Employees who plan to request these direct transfers should do so no later than December 21, 2022. This is because a RMD in general is determined based on the account owner’s account balance as of December 31 of the previous year. For any federal employee becoming age 72 during 2023 and who owns traditional IRAs and/or qualified retirement plan accounts will want to make sure the IRAs and qualified retirement balances are $0 as of Dec. 31, 2o22. Thus, a direct and complete transfer of these accounts into the traditional TSP must be completed no later than Dec. 30, 2022.

Considerations for 2023 TSP Contributions

The TSP announced the contribution limits for calendar year 2023. All employees can contribute (via payroll deduction) a maximum $22,500 to their TSP accounts during 2023. This is an increase of $2,000 over the 2022 contribution limit. Employees who will be over age 49 as of Dec. 31, 2023 (being born before Jan.1, 1974) can contribute a maximum of $7,500 in “catch-up” contributions for 2023. The catch-up contribution of $7,500 during 2023 represents an increase of $1,000 from the “catch-up” contribution limit during 2022. This means that employees over age 49 during 2023 can contribute a maximum $30,000 to their TSP accounts during 2023.

Those employees who plan to retire from federal service anytime during 2023 are allowed to contribute the maximum possible, $22,500 or $30,000, even though they may be retiring before Dec. 31, 2023. Employees who may be retiring during 2023, as a result of an “early-out” opportunity (in the form of a voluntary early retirement authority- VERA, or a voluntary separation incentive program – VSIP), can also contribute the maximum possible to the TSP during 2023.

Employees can elect to choose to contribute to the traditional TSP, to the Roth TSP, or to both TSP accounts. FERS-covered employees receive an automatic one percent of gross pay (SF-50 salary) contribution to their traditional TSP accounts. If a FERS-covered employee contributes at least five percent of their bi-weekly salary each pay date to either their traditional TSP or Roth TSP accounts during 2023, they will receive a maximum four percent matching contribution from their agencies for the year. The four percent maximum matching contributions and automatic one percent of gross pay contribution will always be put into the employees’ traditional TSP account.

To ensure that employees achieve the goal of maximizing their TSP contributions during 2023, employees are encouraged to contribute the maximum possible each pay date starting with the first pay date in January 2023. However, FERS-covered employees also must be aware that in order to obtain the full benefit of their agency’s TSP matching for the year 2023 (maximum 4 percent match), they must make sure that they contribute at least five percent of their salary each pay date during calendar year 2023.

The following worksheet will assist a FERS-covered employee to achieve the goals of maximizing their contributions and receiving the maximum agency match of four percent.

The following two examples illustrate:

Example 4. Juan is a federal employee, age 45, who wants to maximize his 2023 TSP contributions. Juan is covered by FERS. Starting with his first pay date in January 2023, Juan determines using the worksheet what his bi-weekly contribution should be:

Example 5. Joan, age 60, will be retiring from federal service as a FERS-covered employee on June 30, 2023. She will be retiring shortly before the end of pay period 14. Before she retires, Joan intends to contribute the maximum possible to the TSP for 2023. Joan uses the worksheet to determine how much she should have deducted from her salary, starting with her first pay date in January 2023.