Contribution Limits of the Thrift Savings Plan + 401(k) + IRA = ?!?

A reader asks:

I’m in the Reserves and I also have a full-time job with a 401(k) and employer match benefits. I believe the max I can contribute between my 401k, employer match, AND the TSP that is tax deductible is $19,500. Beyond that number, any contributions from myself, my employer, or via the TSP are all after-tax dollars, and I cannot contribute more than $58,000 total between the TSP and 401(k).

Also, the $6000 for an IRA is not included in the $58,000 limit, and the $6000 is tax deductible.

Thanks for your time. I appreciate the help you give on the Mr. Money Mustache forum— I lurk for a fair amount of info and I’ve found it all very helpful. Have a good week!

Thanks to this reader for a very insightful question!

Others may notice potential errors in this reader’s statements. That’s partly due to the wide variety of tax-deferred investment accounts and the word “Roth” that’s mixed in with some of them. It’s also caused by income limits on deductible contributions, contributions from a combat zone, and the type of the account’s tax deferral.

Confusion runs rampant. Hilarity ensues at income-tax time, too.

Even for the same type of account, employers might offer various features and options. 401(k)s are notorious for these subtle differences because the employers can choose among the tax code’s provisions for the options that they feel are most cost-effective. If an employer offers a 401(k) feature, it’s required by law or it helps motivate and retain employees. If an employer does not offer a 401(k) feature, it’s probably because it’s not considered worth the cost of the tracking systems (and audits) to comply with the tax code.

Disclaimer: I asked a CFP to check my research. (Yes, I got schooled.) Everyone’s contribution situation may be different than this reader’s limits, especially with other types of tax-deferred accounts like 403(b), 457s, or Solo 401(k)s.  (See the Solo 401(k) link at the bottom of this post.) Before you reach your contribution limits or approach the calendar deadlines, please do your own research from the links in this post and consider checking with a CFP or other financial advisor.

Another disclaimer: To keep this post to a reasonable length, I’m skipping over the catch-up contributions that a servicemember or employee can make starting at age 50. I’m also not going to get into the differences between a traditional IRA and a Roth IRA, or the distinction between a traditional TSP and a Roth TSP. I’m not even going to discuss when a contribution to a traditional IRA is tax-deductible and when it’s not. If those links don’t address your situation then please consult a CFP or a CPA.

Now let’s get back to the contribution limits.

TSPs and 401(k)s

For Thrift Savings Plans and 401(k) accounts: the Elective Deferral Limit ($19.5K in 2021) annual contribution limit does not include employer matches, but the Annual Addition Limit ($58K in 2021) does include the match. Those numbers can be found at the TSP website’s contribution limits (415 section) and the TSP website’s dual-account contribution limits.

The IRC section 402 and section 415 paragraphs are limitations on the individual (tracked by Social Security Number), but employers won’t know about multiple accounts. For example, if you have two different employers then you can’t rely on them to track each other’s employee contributions and employer matches. Of course, this contribution information is sent to the IRS where their computers might eventually add up the W-2 numbers and determine that there’s an excess contribution. However, if the IRS computers even find the mistake it might take several years, and by then you’d face large excess-contribution penalties.

The EDL is the typical contribution limit from an employee’s pay to a TSP or 401(k).*  If you want to contribute more to the TSP then it has to be as part of a deployment to a combat zone (where your pay is also tax-exempt). If you want to contribute more to your 401(k) then the employer’s 401(k) plan has to permit after-tax contributions. (This is still relatively rare, perhaps because of the employer’s extra expense to track the employee contributions.)

In either of those cases, you’re limited to a grand total (including employer match) of the AAL in each of your TSP account and 401(k) accounts. If you deploy to a combat zone and your employer permits after-tax contributions, then you could hypothetically contribute to the AAL that year in each of the accounts. ($116K in 2021.) However, if you don’t deploy to a combat zone and your 401(k) does not permit after-tax contributions then you’re limited to a total of the EDL ($19.5K in 2021).

That’s not a typo. The EDL is limited to the total combined contributions to the two accounts while the AAL is per each account, or effectively double the AAL for one account. That’s the tax code, not taxpayer logic.

[* Yes, it’s tax-deductible if it’s contributed to a traditional TSP or 401(k). It’s not deductible when it’s to a Roth TSP or Roth 401(k). But we’re not getting into those details in this post.]

Do You Really Want To Contribute To The TSP And Your 401(k)?

You absolutely want to maximize your employer’s matching contributions. (The financial blogger technical term for this is “free money.”) Of course, your TSP account will only receive a DoD matching contribution when you’re in the Blended Retirement System, not the legacy High Three pension system.

The full match in the DoD BRS is a total of 5% of base pay. Reserve and National Guard servicemembers with civilian careers might get a better match from their civilian employers, and when their civilian pay is higher than their military pay then it’s a lot easier to reach their EDL through their civilian pay. If you’re an entrepreneur then you should do the math for your company’s own retirement account rules.

If you’re drilling in the Guard or Reserves with a VA disability rating then a portion of your (taxable) military pay might be waived in order for you to receive your (tax-free) VA disability compensation. This means that you’ll have to do extra math to make sure your TSP contributions stay below your taxable income.

If you’re the type of investor who thrives on tracking contributions among multiple employers with variable pay, then your spreadsheet should be able to keep up with the W-2s.

If you’re already busy with other life priorities and receiving “only” drill pay from the military, then you might opt for the simplicity of maximizing your 401(k) contributions instead of your TSP. Keep in mind, though, that if you’re in the BRS then you want to contribute at least 5% of your base pay for the DoD BRS matching contributions.

The contribution laws are even more complex for making after-tax contributions to a 401(k) or for receiving combat zone tax-exempt pay. You might also have to tweak your contribution amounts nearly every month due to pay changes, and it’s challenging to make the time (and bandwidth) to do this from a combat zone. You can read more about maximizing your TSP contributions while you’re earning CZTE pay and decide if the achievement is worth the effort.

Pro tip: you probably want to contribute as much CZTE pay to your Roth TSP as you can, as long as you’re still receiving your DoD BRS matching contributions for all 12 months of the year. (Never front-load your Roth TSP when you’re in the BRS.) Those CZTE pay contributions are tax-exempt going in, they grow tax-free, and the withdrawals are tax-free.

Summary of the Contribution Limits for 2021

The first limit for Reserve/Guard members with civilian employers offering 401(k) accounts is:

• $19.5K = total employee contributions between TSP & 401(k).

You’ll have to check the math for your salaries and income-tax bracket to decide which employer offers the better match. The match is why many Reserve/Guard members might decide to contribute only to their 401(k) and not their TSP.

If you’re a servicemember and a federal civil-service employee, then the TSP considers you to have the same employer. Check this frequently-asked question from TSP Fact Sheet 07:  “How does the TSP apply the limits if I contribute to both a civilian and a uniformed services TSP account?”

For a servicemember deployed to a combat zone who’s also a federal civil-service employee, then:

• TSP $58K = employee contributions (including combat zone tax-exempt pay) + DoD BRS match + FERS match.

This gets very complicated when you return from the combat zone and resume your federal civil service. Read TSP Fact Sheet 08 for all the details of the FERS agency and matching contributions.

For any servicemember deployed to a combat zone and also having a 401(k) account from a civilian employer:

• $58K = TSP (up to $19.5K) + TSP (CZTE pay) + DoD BRS match + employee contributions to 401(k) accounts (included in $19.5K limit) + employer match.
• This article covers maximizing TSP contributions in a combat zone with the BRS.

For any servicemember with a 401(k) plan that allows after-tax contributions, then:

• $58K = TSP (up to $19.5K) + DoD BRS match + employee contributions to 401(k) accounts (included in $19.5K limit) + employer match + employee after-tax contributions to 401(k).

If this servicemember has a 401(k) plan allowing after-tax contributions and also deployed to a combat zone then:

• $116K = 2 x $58K = TSP (up to $19.5K) + TSP (CZTE pay) + DoD BRS match + employee contributions to 401(k) accounts (included in $19.5K limit) + employer match.

If you’re a servicemember and an entrepreneur who’s set up a Solo 401(k), then this IRS example shows how your contributions are even more complicated.

IRAs – Separate Contribution Limits

IRAs are separate accounts and their limits are separate from the TSP & 401(k) limits.

Whether or not you contribute to a 401(k) or the TSP, you can always contribute up to $6000 of your earned income (or your spouse’s earned income) to your IRA. If you’re over a certain income limit then the contribution to a traditional IRA might be non-deductible, and a different income limit might force you to contribute to a traditional IRA instead of a Roth IRA. But that has nothing to do with the TSP and 401(k) limits. IRS Publications 590a & 590b include all the rules & limits for IRAs.

A Reader’s Actual Example

As we were updating this post for the new contribution limits, a reader volunteered their research and experience. Do your own research for your situation, but here’s the level of effort you might have to exert.

I just got off the phone with a TSP agent and the IRS and found a few more helpful resources that have cleared everything up.

Here is what I found:
For my situation, I am at the $19.5K EDL already with my 401(k) since it was all pre-tax into a traditional account.

However, the AAL is per employer. The IRS provides an interesting hypothetical example of maximizing the $19.5K EDL in an employer 401(k) and doing a full $58K post-tax in a Solo 401(k).

Therefore I can contribute an additional $58K to my TSP in 2021 but only with CZTE to my traditional TSP. If my civilian employer allowed post-tax contributions to my 401(k) (which they don’t unfortunately) I could also go up to $58K there (minus my EDL contributions in the account and their match of course).

Any Roth TSP contributions, including CZTE pay, count against your EDL. The only TSP contributions that a service member can do that do not count against their EDL (across all retirement accounts) are CZTE pay contributions to a traditional account. BRS matching of course does not count against the EDL— see the note on the bottom left of page 2 at that link.

As you said, tracking this is the individual’s responsibility which is tough. It seems like there is a lot of incorrect tribal knowledge among servicemembers that has resulted in them unknowingly far exceeding the EDL between their 401(k) and TSP. Whether (or when) the IRS eventually adds up those W-2 block 12s and flags the violation is anyone’s guess.

So, I legally can’t contribute to a Roth TSP even with CZTE pay at this point since I maxed my EDL for the year in my 401(k) already. My plan is thus to contribute as much CZTE pay to my traditional TSP as possible, and then finagle transferring it to a Roth IRA if possible when I get my new DD214. (The TSP documentation is very murky on whether separating from active duty but staying in the Reserves or Guard allows you to transfer your TSP out to an IRA… I will try though.) Worst case if it’s stuck in the TSP until I hit my retirement, tax free growth is still good.

Appreciate all of the help and enjoy your week!

[This post has been updated for 2021 from a reader’s 2015 question and with more examples.]

Related articles:
Is The Roth TSP Right For You?
IRS example of maximizing the EDL in an employer 401(k) and doing a full $58K post-tax in a Solo 401(k)