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Advice on how to prepare for life after government.

The Roth Option

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One big piece of news in the federal retirement arena lately was the announcement that federal employees (well, some federal employees anyway) will be able to opt in to the Thrift Savings Plan’s new Roth option starting May 7.

This new benefit has been in the process of being implemented since the TSP Enhancement Act was signed into law in 2009. The TSP has been working diligently to implement the benefit for all active federal employees and (eventually) members of the uniformed services.

The new feature will affect almost every aspect of the TSP. In fact, starting May 7, you’ll find most of the forms and publications available on the TSP website will have 2012 revision dates so that information relative to the Roth TSP option is included.

It’s important to consider several questions when weighing whether to put some of your savings in a Roth account:

  • What is the difference between contributing pre-tax dollars to the TSP vs post-tax dollars?
  • When borrowing or withdrawing funds from the TSP, how will those distributions will affect the traditional and Roth balances in your TSP account?
  • How will contributing to the Roth TSP affect your taxes today and in the future? (I wrote a column addressing this issue in March.)
  • When withdrawing money after you separate from federal service, how will the distribution affect the taxes you owe, including early withdrawal tax penalties and required minimum distributions?

Fortunately, the TSP has provided some answers to these and other key questions. If you’re a TSP participant, you already should have received a pamphlet called 2012 Roth: A New TSP Element. There’s additional information in the January/February and April editions of TSP Highlights. And the TSP has produced a two-minute video providing a brief overview of the new option.

By the time May 7 arrives, there will be even more resources available to answer almost all of your questions, except the critical one: Should you participate in the Roth TSP? That you’ll have to decide for yourself after evaluating the advantages and disadvantages of saving post-tax dollars that will grow tax-free.

The most important thing to know is that the Roth TSP is not a Roth IRA. If you decide to allocate some of your future contributions to the Roth TSP, you will be paying income tax on those contributions first. You won’t pay tax on the earnings as long as you wait to make a withdrawal until you are at least 59 ½ (or disabled or deceased) and your withdrawal is made at least five years after the beginning of the year in which you made your first Roth contribution.

If you’re interested, check with your payroll or benefits office in human resources to see when you can submit a request to allocate contributions from your basic pay to the Roth option. Some systems will be ready for business on May 7 and others in June. Some systems won’t be ready to accept Roth contributions until later this year.

If you have more questions about the Roth option, you can ask the TSP’s Executive Director, Greg Long, who will be will be our guest on the For Your Benefit program on Federal News Radio on May 14 at 10 a.m. ET. Email your questions or call the show live at 202-465-3080.

 

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

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