TOPICS
TOPICS
Reviewing Roth
Unlike traditional 401(k) plans, Roth plans tax investments initially, but not when participants withdraw their retirement dollars years later, allowing any earnings accumulated from the funds to be taken out tax-free. The option can be especially attractive for younger investors, who likely fall in a much lower tax bracket earlier in their careers than when they retire.
Private sector employers have had the legal authority to offer Roth plans since Jan. 1, 2006, but the TSP isn't authorized to offer such accounts. According to a 2007 survey by Hewitt Associates, an employee benefits consulting firm, 12 percent of private companies offer a Roth option.
While TSP officials are not currently seeking authorization to offer a Roth option, plans to look into the costs and benefits of such a move are in the works. Once the TSP hires a new product development director (a position left vacant when Gregory Long moved to become executive director last March), he or she will take on the task of determining whether the Roth option is right for the TSP, said Thomas Trabucco, the plan's legislative director.
The majority of the plan's 3.5 million participants appears to support the addition of a Roth option. A survey released last year by Watson Wyatt indicated that 60 percent of participants believed the TSP would be a better program if it offered a choice of contributing to a Roth account.
Still, Trabucco said it could be another two years before a determination is made on the idea. If TSP officials ultimately back such a move, they'll have to go to Congress for specific authority.
"We want to see how private plans use their new authority, and we need to look into who in the federal sector could benefit," Trabucco said. "I don't think anyone would like us to spend millions in participant funds to set this up only to find that it is not very beneficial or popular."
Members of Congress, however, might press the TSP to accelerate its timetable. Rep. Henry Waxman, D-Calif, chairman of the House Oversight and Government Reform Committee, has expressed interest in extending the Roth feature to the TSP. His office did not return calls seeking comment.
"I would not be surprised if a legislative proposal regarding Roth is dropped in the hopper," Trabucco said. "This is the best method any member has to show interest in a new initiative."
A swift legislative move in support of Roth accounts could prove problematic. TSP officials say adding such a plan would entail overhauling the TSP's systems and communications materials and would require them to educate 3.5 million participants on how to choose wisely between pre-tax and after-tax investments. Agency payroll systems would have to be updated as well, officials say.
"We know it will cost money and a great deal of effort to set up," Trabucco said, "and before doing that we need to be relatively certain that a significant number of participants could benefit from it and would take advantage of it if it became available."
Scholarship Showdown
The Federal Employee Education and Assistance Fund is accepting applications for its 2008-09 scholarship program.
Civilian federal and postal employees with at least three years of service and their dependents are eligible to apply. Federal applicants must be full- or part-time students with a grade point average of 3.0 or higher. Dependents must hold an equivalent GPA and be full-time students to qualify.
Last year, FEEA awarded more than $471,000 to 481 students nationwide. The top six competitors were the first-ever recipients of the FEEA and National Treasury Employees Union scholarships, worth $5,000 each.
For more information on how to apply, visit www.feea.org/scholarships.html.
COMMENTS
- I’ve noticed several things about Roth’s lately from this article to an announcement by the TSP web site (at the Plan News section) and email system. And I quote: “Transfers to Roth IRAs — You can now transfer or roll over certain TSP withdrawal payments to a Roth IRA unless your modified adjusted gross income is more than $100,000 or you are married but file separate tax returns. You will have to pay tax now on all of the money you transfer or roll over from your TSP account to a Roth IRA, but your earnings will be tax-free if you satisfy the withdrawal rules for the Roth IRA. If I read this correctly, the only thing the TSP board did as a concession to our desire for a Roth option in the TSP is to forgive the repayment requirement for any early withdrawals from the TSP. While I applaud any progress, I worry that the TSP board, in their omnipotence, with consider this to satisfy our desire for a TSP Roth option. If they are listening, I say thee “Nay!” We want a Roth in the TSP! We wish to be able to make an after-tax employee contribution from our DFAS system straight to a Roth account accessible and controllable through the TSP web site and reporting mechanism. Please Mr’s Trabucco and Saul hear us for once and finally; please expedite this development and create a feedback mechanism on your web site that solicits input from your participants. (Perhaps then you will actually find out what kind(s) of service we desire.) Tip off Posted March 5, 2008 11:23 AM
- Yes, I contribute the maximum to my TSP since I have less than 5 years to retire. It also helps reduce the amount of taxes I pay a year since I'm a widow and considered single (higher tax bracket). It would be nice to have a Roth IRA option within our TSP, but I have a problem with having all my money in one location (financial institution). I'm going to look into Randy's suggestion of an IRA tax free bond. Civilian Worker Posted February 20, 2008 9:46 AM
- Dear Civilian Worker with the taxed Traditional IRA, correct me if I’m wrong, but if the amount you are contributing to your TSP is causing your Traditional IRA to be taxed, then you must be bouncing off your maximum contribution limits. Bravo!! If that is so, then a ROTH really is the best balance for you. The pre-tax TSP & 401(k) limits are currently $15,500 for 49 & under and $20,500 for those 50 and up. What confused me a bit is that (once more, correct me if I am wrong) most all contributions to a Traditional IRA are made with after-tax monies, unless your employer does the transfer before you get the money out of pre-tax dollars, and I don’t think Uncle Sam does that for commercial products. You gain your tax advantage when you file your yearly income tax later and recoup those funds/savings. I’m probably just reiterating what you already know to clear my own mind. But you are exactly right, “Why pay taxes on the same money TWICE?” Additionally, if we take an “acceptable” (if low-balled) estimate of 8% annual gain, times a 20 – 30 year career, use the Rule of 72; we should be able to grow those pre-tax dollars 4 to 8 times. [72 / 8 = 9 years to each doubling of our funds. 20 (year career) / 9 = 2+ times doubled (or 4Xs) or a 30 (year career) / 9 = 3+ times doubled (or 8Xs)] Thus every $100 dollars of pre-tax could become $400 to $800 dollars of taxable income even while it shrinks our Social Security income estimates. No wonder why the government doesn’t mind us pulling that income out of the taxable coffers. They, like big business, know the miracle of compound interest. What they lose now they will reap at least fourfold in the future. That is also the reason the ROTH annual contribution limits are likely to stay at 25 – 33% of the pre-tax limits. [$5,000 vs. $15,500 or $20,500]. Congratulations for an excellent strategy. I only wish we didn’t have to go outside our TSP retirement system to seek this balance. Cost savings anywhere near the current 3 basis points would make a TSP ROTH extremely attractive. Too bad the TSP board doesn’t have a decent financial advisor. Tip off Posted February 6, 2008 9:17 AM
