FERS employees generally have three primary ways to build for retirement: a FERS pension, Social Security, and the Thrift Savings Plan (TSP). The last of these three — the TSP — is a government-sponsored 401(k) program that allows federal workers the opportunity to accumulate retirement savings. Though the TSP does have a certain amount of flexibility, there are annual TSP contribution limits. Once this ceiling is reached, an employee can no longer contribute to TSP for that year; however, that does not mean an employee is unable to accumulate retirement savings. IRAs or Individual Retirement Arrangements allow federal employees to accumulate retirement savings in much the same way as the TSP, with a few significant differences. Let’s review the 2021 IRA contribution limits.
CAN I CONTRIBUTE TO AN IRA?
When it comes to IRAs, there are both contribution and income limits. The IRA contribution limit for 2021 is an annual amount of $6,000 for those younger than 50. People ages 50 or older can allocate a maximum of $7,000 annually to an IRA. Note that this is the limit for total IRA contributions. In other words, those younger than 50 can fund no more than $6,000 total to IRAs, whether Roth, traditional or some combination of the two. Additionally, the IRA contribution limits are different—and significantly lower than that of the TSP. For more on TSP contribution limits, see our blog.
The chart below lists both the 2021 IRA and TSP contribution limits; neither of which changed from 2020.
Roth IRA contributions are subject to contribution phase-out for higher-earning individuals. According to the rules for 2021, those filing single and earning more than $140,000 and married couples filing jointly who earn more than $208,000 are not able to contribute to a Roth IRA at all.
A traditional IRA, like the traditional TSP, is not in itself an investment but is merely a “tax-wrapper” in which investments are held. This “tax-wrapper” means that IRA and TSP funds receive special tax treatment; the funds are tax-deferred. With tax-deferred money, assuming several key requirements are met, one pays no tax when contributing to the IRA, but instead pays tax when withdrawing the funds. In certain situations, this can be very beneficial, especially if one will be in a lower tax bracket in retirement. However, federal employees with a robust pension are not guaranteed to move to a lower tax bracket in retirement.
A Roth IRA is simply another kind of “tax-wrapper.” Roth funds are often called “tax-free.” However, this phrase can be a bit misleading. Tax is paid when one contributes to a Roth IRA. Nevertheless, the money grows tax-free and will be tax-free when one begins to withdraw money in retirement, assuming other requirements are met. Roth money can be accessed tax-free for those who have owned the account for at least five years and are at least age 59 ½. For individuals who will not be in a lower tax bracket in retirement, as can be the case for federal employees, Roth IRAs may be a beneficial option.
REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
One key difference between traditional IRAs and Roth IRAs is the handling of required minimum distributions (RMDs). Traditional IRAs require one to begin taking withdrawals or required minimum distributions from the IRA at age 72. When one begins taking RMDs, taxes must be paid on these distributions. Roth IRAs vary from traditional IRAs in this area. Roth IRAs are not subject to RMDs. Not being forced to withdraw unneeded money is a significant aspect of Roth IRAs and one which further distinguishes the Roth IRA from federal employees’ traditional IRA and TSP options.