Employees Who Contributed Both to the TSP and to Another Tax-Deferred Retirement Plan During 2023 Need to Beware of Excess Elective Deferrals
Retirement Plan
The following example illustrates:
Jason, age 62, retired from federal service on July 29,2023. During the period January 1,2023 through July 28,2023 when Jason was a federal employee, he contributed the maximum $30,000 to the TSP ($22,500 regular contributions plus $7,500 catch-up contributions). Jason started working for a private company on September 1, 2023. Jason has access to a profit-sharing retirement plan through his private company in which employees who participate in the retirement plan receive company matching contributions of 8 percent. Jason immediately started contributing to the 401(k) plan and continued to do so through the end of December 2023. Jason did not realize that he was ineligible to contribute to the 401(k) plan during 2023 because he had already contributed the maximum $30,000 to the TSP for the year 2023. Jason will therefore have to withdraw his excess elective deferrals – either from the TSP or the private company 401(k) retirement plan. This TSP withdrawal procedure is explained below.
There are some federal employees who are also members of the uniformed services Ready Reserve. These employees contribute to the civilian TSP and when they are activated and serve in the Ready Reserve, they are eligible to contribute to their uniformed services TSP account. Each year in January, the TSP will check to see whether a federal employee’s combined contributions made during the preceding calendar year to both accounts (the civilian TSP account and the uniformed services TSP account) exceeded any of the limits- regular contributions and regular contributions plus “catch-up” contributions. To do so, the TSP will add up the traditional TSP and the Roth TSP contributions made to both accounts. Note that the traditional tax-exempt contributions made to a uniformed services member account (while the uniformed service member is deployed to a designated combat zone) do not count toward the elective deferral limit. The TSP will then withdraw any contributions that exceeded the applicable limit, along with attributable earnings on those contributions before April 15. The employee need not take any action to request the return of excess contributions.
Elective deferrals and their associated earnings in a uniformed services TSP account will be returned before those elective deferrals in the civilian TSP account. If a civilian employee/uniformed service member made both traditional TSP and Roth TSP during the year, the excess elective deferrals plus their earnings, are returned to the civilian employee/uniformed service member. This will be done to return amounts in a proportional manner from the traditional TSP and Roth TSP balances.
A federal employee who made excess elective deferrals to the TSP and to another retirement plan (see table above for other retirement plans) needs to log into his or her TSP MyAccount and complete Form TSP-44 402(g) (Refund Request Form). Form TSP-44 402(g) must be submitted no later than March 15 in order for the TSP to process the employee’s excess deferral refund request by April 15.
Employees who contributed to the traditional TSP during calendar year 2023 will see in box 12 (Code “D”) of their 2023 Form W2 the total amount of contributions they made via payroll deduction during calendar year 2023.
Those employees who have made excess deferrals during 2023 because they participated both in the TSP and another retirement plan (such as Jason in the example above) can choose to have the excess deferrals withdrawn from either the TSP or the other retirement plan. If an employee chooses to have the excess deferrals withdrawn from the TSP as a refund (via Form TSP-44 402(g)), then the employee will receive IRS Form 1099-R which will indicate the amount of the excess that was refunded to the employee.
Employees who have made excess deferrals to the traditional TSP and who request a refund of those excess deferrals must report the total amount of the excess on the employee’s federal income tax return that year as taxable wages for that year. Roth excess deferrals are also taxable wages for the year in which excess deferrals are made. However, the amount to be reported as excess deferrals when it comes to the Roth TSP is already reported as income on the employee’s W2 statement, Box 1 (Taxable Wages).Associated earnings distributed with excess elective deferrals are considered taxable income in the year in which the earnings are distributed. This is unlike the excess electives deferrals which are considered taxable income in the year they are contributed. Those employees who have Roth contributions as part of their excess deferrals will owe taxes on the Roth earnings as well.
Employees will receive a separate IRS Form 1099-R indicating the amount of the earnings. The earnings must be reported as income in the year in which the distribution is made. The distribution is reported to the IRS.
Distributions of excess deferral and associated earnings are not considered an early withdrawal and are therefore not subject to an IRS tax penalty. This is provided the excess deferral and associated earnings are distributed by April 15 following the year the excess deferrals were made.
A FERS employee’s agency will be notified when the employee requests excess elective deferrals and associated earnings returned to the employee. The agency is then required to remove the agency TSP matching contributions associated with these excess elective deferrals.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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