05 Apr THE ROTH TSP OPTION
Who might want to take advantage of it? Who might not?
Do you have a Thrift Savings Plan account? Then you should know about an important new development. Starting in spring 2012, FERS and CSRS employees will be able to have two types of balances in their TSPs: a traditional (non-Roth) balance and a Roth balance. Service members will also eventually be able to have this option.1
Why is the Roth option such big news? For comparison, let’s use the example of the traditional IRA and the Roth IRA.
- With a traditional IRA, your contributions aren’t taxed, but your withdrawals are when you retire. You also have to make mandatory withdrawals from the IRA when you hit your seventies.
- With a Roth IRA, your contributions are taxed today, but your withdrawals aren’t taxed when you retire (provided you follow the rules). You never have to make mandatory withdrawals from a Roth IRA.2
So now that the TSP is adding a Roth option, you have the choice of paying income taxes on either the front end or the back end of your retirement savings contributions. If you think that your federal income taxes will be higher in future years than they are today, you have an argument for boosting your Roth TSP balance.
Who would potentially benefit the most? As TSPs are portable, the Roth TSP option may be very appealing to…
- Younger federal employees who need to start retirement nest eggs yet don’t plan on lifelong civil service careers
- Younger service members who see themselves transitioning to civilian life before serving long enough to qualify for retired pay
- Service members earning tax-exempt pay in a combat zone
- Judges & other select federal employees who may pay lower taxes during their years of government service
If you are in one of these groups, the Roth TSP option may be worth a look.
And who wouldn’t? If you are not in one of the above groups, the Roth TSP option may not be so worthwhile. Here’s why: many federal employees retire to a lower income than his or her end salary, with correspondingly lower taxes. If your taxes are going to be lower when you retire, wouldn’t you rather pay the taxes on your retirement contributions tomorrow rather than today?3
A look at the fine print. Here are some key details to remember about the Roth TSP option:
- You will be able to contribute to a Roth balance and a non-Roth balance within the same retirement savings account. It isn’t an either/or choice. You can invest in both balances up to a combined annual dollar limit ($17,000 for 2012).
- Agency contributions will never be Roth contributions. They will always be added to your non-Roth balance.
- You can designate your own contributions however you like – they can be Roth contributions or non-Roth contributions as you prefer.
- When/if you start making Roth contributions to your TSP, any money that is already in your plan will remain in your traditional balance. You won’t be able to convert it over to the Roth side.
- You can transfer funds from Roth 401(k)s, Roth 403(b)s and Roth 457(b)s into a Roth TSP, and you can transfer funds out of a Roth TSP to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s and Roth IRAs.
- If you turn 50 sometime in 2012, you can make a catch-up contribution to a Roth TSP balance just as you can for a traditional TSP balance. So if this applies to you, your combined annual dollar limit for TSP investment in 2012 is $22,500.1,3,4
The bottom line. Chat with the financial professional who helps you out with your TSP before you direct contributions to a Roth balance. You will want to spend some time thinking about your potential retirement income and whether federal income tax rates might rise or fall in the coming years relative to today. More information on the Roth TSP option may be found at www.tsp.gov.
Kevin M. Nast is a financial advisor with Transamerica Financial Advisors, Inc. and may be reached at 248.347.1888 or www.Map2Finance.com.
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1 – www.tsp.gov [3/7/12]
2 – money.cnn.com [3/7/12]
3 – www.federaltimes.com [2/12/12]
4 – www.washingtonpost.com [2/28/12]