Paycheck Chronicles

Roth TSP: It's Coming


My husband recently received his Thirft Savings Plan (TSP) annual statement, and it included a little trifold brochure on the  soon-to-be-available Roth TSP option.  This will give TSP participants the choice of using pre-tax or after-tax dollars for their retirement savings.  Under the current TSP plan, all contributions are made with pre-tax dollars.  This decreases your tax liability now, but you will have to pay taxes on that money when you receive distributions from your retirement account.

What IS a Roth TSP?  Roth a term used to describe retirement accounts that were authorized in the Taxpayer Relief Act of 1997.  This new type of retirement account was championed by Senator William Roth of Delaware.  The original legislation created the Roth Individual Retirement Account (IRA.)  The Roth IRA has different features from the Traditional IRA.  Soon, those features  will be available in a Roth TSP Account.

In a Roth Account, contributions are taken from after-tax dollars.  In the case of a TSP account, the money will still be deducted automatically via payroll deductions, but taxes will be calculated including the amount going to the Roth TSP account.  When you withdraw funds from a Roth account, you do not pay taxes on the contributions.  You also do not pay taxes on the earnings if you are at least 59 1/2 years old (or disabled) and the Roth account is at least five years old.

In a Traditional account, contributions are tax-deferred.  This lowers your taxable income for the year in which you make the contributions.  The earnings are also tax-deferred.  Taxes are owed on the contributions and their earnings when withdrawals are made.

Who might want to utilize the Roth TSP option?

Service members earning tax-exempt pay in a combat zone

The contributions will not be taxes at the time of contribution because it is tax-exempt money.  The contributions and earnings will not be taxed at the time of withdrawal because it is a Roth account.  No income taxes on this money, ever!

Service members who think they will be in a higher tax bracket when they retire

This category includes a lot of people.  Many service members pay little to no income tax during the years of their service.  If you are not paying income taxes now, and you contribute to a Roth account, that money will come out untaxed as well.  In addition, if you are currently in a low tax bracket, you are not benefitting from the tax advantages of a Traditional TSP account.

You think that income tax rates are going to increase in the future

This is a little more speculative, but still something to consider.  For my own decision making, I think that tax rates will rise.  I might be right, or I might be wrong.  We'll see.

You are aged 50 or over, deployed to a combat zone, and want to make catch-up contributions to your TSP

For some reason, you can't make catch-up contributions to your traditional TSP from tax-exempt pay.  Therefore, the Roth IRA gives you an opportunity that doesn't currently exist.

Some notes about the new Roth TSP:

There are not currently plans to offer a conversion options.  Old traditional funds will remain in a traditional account, even if you open a Roth TSP.

The combined total of contributions may not exceed the elective deferral limit set each year.

Any loans, in-service withdrawals, and partial withdrawals will come out of your total account on a pro-rata basis with a proportional amount coming from your traditional and Roth balances.  You can't choose to take loans or withdrawals from a specific part of your TSP account.

The exact availability date has not yet been determined.  More information can be found at the TSP website.

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