TSP Roth option to launch May 7

Federal employees, including uniformed service members, can opt in to the Thrift Savings Plan’s new Roth 401(k) offering beginning May 7, the TSP’s board announced Wednesday.

The Federal Retirement Thrift Investment Board has been working with agencies to develop new payroll systems that will accept the option, which allows employees to invest money that’s already been taxed so it will not be taxed again upon withdrawal. According to the board, not all federal agencies have completed the transition required to implement the Roth TSP; some might need additional time after May 7.

The TSP’s Roth offering will be similar to those in the private sector, but unlike a traditional Roth IRA, there will be no income limits.

Employees who choose the Roth option still will receive matching contributions from their agencies, draft rules stated. Those matching funds will continue to go toward their traditional TSP account balances.

With the change, participants now can invest pre-tax or after-tax dollars in any of TSP’s funds as long as their total contributions are within Internal Revenue Service limits. The IRS increased the cap on individual TSP contributions in 2012 from $16,500 to $17,000, due to a change in the cost-of-living index. Employees 50 and older can contribute an additional $5,500.

TSP officials have called the Roth option a “game changer” for younger federal employees in particular. It also could be a draw for young service members who often receive annual allowances of $20,000 to $25,000 and would be better off being taxed on those earnings than their presumably much higher income at the time they retire. 

The Federal Retirement Thrift Investment Board will continue to provide agencies and participants with educational materials about the new plan, but recommends that participants seek the advice of a qualified tax or financial adviser for answers regarding their specific tax situation, Gregory Long, the board’s executive director, said on Wednesday.