TSP Funds and Roth IRAs

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Federal employees with money invested in the Thrift Savings Plan will not be able to roll their savings over directly into a Roth Individual Retirement Account, the Internal Revenue Service has told GovExec.com.

To take advantage of a Roth IRA, which investment specialists are calling a smart bet for many Americans, TSP enrollees must first roll over their investments into a traditional IRA, and then roll over the money into a Roth IRA.

The new Roth IRA, named for Senate Finance Committee Chairman William Roth Jr., R-Del., will be available beginning in 1998. Long-term investors are most likely to take advantage of the Roth option, which was designed to encourage savings. Individuals will be able to contribute up to $2,000 each year after taxes. After five years, no tax is paid on the money earned off a Roth IRA if it is withdrawn after age 59 1/2 or if it is used to buy a first home. No tax is placed on the money if the individual dies or is disabled, either.

In addition, the Roth IRA departs from traditional IRAs by allowing investors over the age of 70 1/2 to continue to contribute money. And in cases of emergency, tax-free withdrawals below what an individual has invested are permitted even before the five-year time limit is up.

Roth IRAs are limited for individuals making more than $95,000 and are not available to individuals who make $110,000 or more. Couples who make $160,000 or more cannot contribute to a Roth IRA, with limitations beginning for couples making more than $150,000.

When government employees retire or quit, they may opt to transfer all or part of their TSP account directly into a traditional IRA. According to the Federal Retirement Thrift Investment Board, which runs the TSP, the annual limits on IRA contributions (normally $2,000 for individuals) do not apply to these transfers and no tax is paid on the money transferred into an IRA.

Additional limitations apply when money is rolled over from an IRA to a Roth IRA. Guidance is available from the IRS and on the Roth IRA Web site (www.rothira.com).

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