Does TSP Count Towards the 401k Limit?

Retirement savings plans, such as the Thrift Savings Plan (TSP) and 401(k)s, are fundamental tools for building financial security. Many individuals utilize these plans to save for their future, often wondering how contributions to different plans interact with annual limits set by the Internal Revenue Service (IRS). This article aims to clarify how contributions to the TSP and 401(k) plans are treated concerning these federal contribution limits.

Understanding Elective Deferral Limits

The IRS establishes annual limits on “elective deferrals” for defined contribution plans. Elective deferrals refer to the money an employee chooses to contribute from their salary to a retirement plan. This amount is directly deducted from their paycheck, either before taxes for traditional plans or after taxes for Roth options. The IRS periodically adjusts this limit to account for inflation.

This federal limit applies broadly to employee contributions across various types of workplace retirement accounts. It serves as a ceiling for the amount an individual can personally contribute from their earnings each year.

Thrift Savings Plan Contributions

The Thrift Savings Plan (TSP) is a retirement savings plan specifically designed for federal employees and members of the uniformed services. Participants can contribute to the TSP through regular payroll deductions. These employee contributions are classified as elective deferrals, similar to those in private sector plans.

TSP offers both traditional (pre-tax) and Roth (after-tax) contribution options. Beyond employee contributions, the TSP also includes distinct agency contributions. These consist of agency matching contributions, where the employer matches a portion of the employee’s contribution, and agency automatic (1%) contributions, provided regardless of employee contributions.

401(k) Plan Contributions

A 401(k) plan is an employer-sponsored retirement savings plan available to employees in the private sector. Individuals contribute to their 401(k) accounts through payroll deductions, similar to the TSP. These personal contributions are also considered elective deferrals under IRS regulations.

Employees typically choose between pre-tax contributions, which reduce current taxable income, or Roth 401(k) contributions, made with after-tax money for tax-free withdrawals in retirement. In addition to employee contributions, 401(k) plans often include employer contributions. These can be matching contributions, based on employee deferrals, or profit-sharing contributions, which are discretionary.

Applying Limits Across Both Plans

A common question arises when individuals contribute to both a TSP and a 401(k) plan within the same tax year. Employee elective deferrals made to both a TSP and a 401(k) plan count towards a single, combined IRS annual elective deferral limit. This means an individual’s total combined employee contributions from both plans cannot exceed the federal limit for that year. For example, if the annual elective deferral limit is $23,000, and an individual contributes $15,000 to their 401(k), they can only contribute an additional $8,000 to their TSP.

Employer contributions, such as agency contributions in the TSP or employer matching and profit-sharing contributions in a 401(k), do not count towards this specific employee elective deferral limit. These are instead subject to a separate, higher overall defined contribution limit, which encompasses both employee and employer contributions to a single plan.

Catch-Up Contributions for Older Savers

Individuals aged 50 or older by the end of a calendar year are eligible to make additional contributions to their retirement accounts, known as “catch-up contributions.” This allows them to contribute an amount above the standard elective deferral limit.

The catch-up contribution limit also applies across both TSP and 401(k) plans combined. For instance, if the regular limit is $23,000 and the catch-up limit is $7,500, the total combined employee contribution from both plans cannot exceed $30,500 for an eligible individual.