How to Get Ready for TSP Catch-up Contribution Changes in 2021

This rollercoaster of a year is rapidly drawing to a close, and that means it’s time to adjust your financial plan for 2021. If you haven’t thought about your retirement savings for a while, that’s okay — you’ve probably had a lot of other things on your mind! But before the New Year arrives, you’ll want to look over your Thrift Savings Plan (TSP) contributions and make some adjustments. 

An annual review of your retirement savings and financial plan is always a good idea, but this year it’s even more important. That’s because there are big changes to TSP rules about catch-up contributions coming your way. But unlike most of the surprises that popped up in 2020, this is news that should actually make your life easier. 

Here’s what you need to know.

Catch-up Contribution Basics

First, a definition. Federal employees who contribute to TSP accounts for retirement are subject to certain rules about how much money they can invest. IRS rules limit you to $19,500 per year — if you’re under age 50. But once you turn 50, you are allowed to contribute more. Catch-up contributions refer to the allowable amount over the $19,500 limit that you can contribute to your TSP between age 50 and the date of your retirement.

Catch-up contributions are designed to help people who are nearing retirement age pad their TSP accounts so they can reach their goals. Once you turn 50, there’s not as much time for compound interest to accrue and grow your nest egg, but adding more cash will help you build a solid foundation for future income. They’re called catch-up contributions in recognition of the fact that many people didn’t immediately open a retirement account when they enlisted or got their first job. Whether you waited a decade to open your TSP or just weren’t able to max out your contributions when you were younger, catch-up contributions give you a chance to make up for lost time now, while you are earning more at this stage in your career.

Catch-up contributions allow you to invest an additional $6,500 per year in your TSP once you turn 50. That brings your total allowable contributions for the year to $26,000 — a big boost to your savings if you can take advantage.

Rule Changes for 2021

If you are over 50 and already taking advantage of catch-up contributions, you know that the old rules were a bit challenging. Up until now — and through the end of 2020 — anyone wishing to make catch-up contributions had to fill out two different forms with your employer: one for your regular contributions of up to $19,500 each year, and a separate form for the catch-up contributions of up to $6,500 each year. This system also required double the paperwork for HR reps, making the process ripe for errors. 

The biggest potential problem? Making a mistake along the way that could shut you out of your 5% match, leaving you with less retirement savings than you would normally be entitled to.

Given the issues with the old system, the 2021 catch-up contribution rule change is good news. 

Instead of the extra paperwork and separate contributions, the new rules employ what’s known as the spillover method to calculate catch-up contributions. This means that you only need to fill out one form to elect to make TSP contributions. You’ll simply let your employer know how much of your pay to sweep into your TSP account, and that’s it. 

On your employer’s end, they’ll figure out at what point your contributions are in excess of the $19,500 and “spill over” into catch-up contributions. This is now automatic, and you’ll never have to think about it once you decide how much to contribute and file your form.

And honestly, this is how it should be.

Your Action Plan for Catch-up Contributions

Now that making catch-up contributions is easier than ever before, it’s time to take advantage! Here’s what you need to do:

Step One: Review Your Contributions

How much are you contributing to your TSP right now? If you were hired (or rehired) starting October 1, 2020, you were automatically enrolled at 5% of your salary — the exact amount you need to max out your matching funds from your employer. 

If you were hired before then, take a look at your last pay stub to see how much you’re contributing. If it’s not at least 5%, you definitely want to increase your contribution to reach that amount — anything less, and you’re leaving free match money on the table. 

Step Two: Challenge Yourself to Max Out

Even if you’re already contributing 5% of your salary to your TSP, you can still do more. Remember, the limit for workers under age 50 is $19,500 per year ($750 per biweekly paycheck). If you’re over 50 and adding catch-up contributions, the limit is $26,000 ($1,000 per biweekly paycheck). If you’re not hitting that mark and want to, ask yourself how you can make room in your budget to get a little closer. 

If you’re like most people, 2020 probably saw a decrease in some of your spending, particularly on things like travel, eating out, movies, sporting events, and the like. If you normally spent $100 per month on these activities, consider increasing your contributions by that same $100 — you probably won’t miss it.

If you received a step increase or promotion, you can also try putting most or even all of your income boost into your TSP. Because this money comes out of your check before you even cash it, retirement contributions can be “invisible.” You won’t notice that a little extra has come out of your check — until you look at your TSP balance, that is!

Step Three: File the Paperwork

Once you’ve decided on your new contribution amount, it’s time to file the paperwork. The new system begins on January 1, 2021, so ideally you will complete your forms in time to start the New Year right.

Most civilian agencies have electronic payroll systems, so use yours to increase your contributions online. Armed forces members can use myPay (Air Force, Army, Marine Corps, and Navy) or Direct Access (Coast Guard and NOAA Corps). USPHS Commissioned Corps members, however, need to fill out paper forms instead, so contact your payroll officers for more information.

Remember, your goal is always to contribute as much as you possibly can to your TSP. The minimum should be 5% so as to get the full benefit of your matching funds, but that’s just for starters. Challenge yourself to do more in 2021 — including taking advantage of catch-up contributions if you’re over age 50.