Roth TSP: Exploring this NEW Retirement Savings Plan Feature for Federal Employees

Originally posted September, 2012

The Roth Thrift Savings Plan (TSP) has arrived. For employees of the federal government, this is greatnews. For those concerned about future tax rates (and who isn’t?), this is an opportunity to accumulate funds efficiently. First, let’s talk about how it works, and then we’ll address why it’s so valuable.

Through payroll deductions, employees can elect after-tax contributions to the Roth TSP account. In 2012 you can contribute up to $17,000 and if you are over age 50, you may contribute an additional $5,500 for a total of $22,500. These values should be similar in 2013. Any matching to the plan still goes into a traditional TSP account on a pre-tax basis and will be taxable when withdrawn by the participant. So over time, two different balances are accumulating. At retirement or whenever the funds are accessed, after age 59.5, the Roth balance is income tax-free, and the matching balance is taxable, however, each person can choose from which balance they would like to distribute funds. While in the plan, the investments are the same as the traditional TSP. The contributions to the Roth TSP can occur regardless of your household income, unlike the Roth IRA where if your income is too high you are limited. So now there’s an opportunity through payroll to increase the total amount you are saving to the Roth.

Why is this so valuable? For most households, the vital aspect of all the Roth TSP characteristics isn’t the increased contribution levels or the tax-free status that will cause larger Roth balances. It’s the words, “Through payroll deductions”. Why is that? Because it’s easy. In the past, there were only two ways to accumulate money in a Roth status. Maybe you kept your household income under a certain level and wrote check for up to $5,000 or $6,000 a year. Some people have that money available and some don’t. Some have it available but don’t feel comfortable writing that large of a check that they will only benefit from years in the future. The other method was to convert an existing pre-tax balance to a Roth through a conversion. Here, you can now convert as much as you want, however it’s all taxable. So instead of writing a check to the Roth you’re writing a check to the IRS for the privilege of getting the funds in the Roth. If writing a check to benefit yourself in the future is difficult, try writing a large one to the IRS. Work with a tax advisor to verify you are following all of the proper guidelines on Roth contributions and conversions. Many don’t pull the trigger on this Roth conversion strategy.

So now, just by making a simple election on a form, any dollar amount you would like (within the IRS limits) can be automatically deposited into the Roth TSP account. There are no checks to write and it’s “out of sight, out of mind.” And, rather than trying to build up the Roth balance all at once through the conversion, you can do so a little at a time every two weeks. Over time, depending on how you allocate it and how much you contribute, it can accumulate to quite a sum. Maybe even a large enough balance that when you retire from work, you can retire from paying taxes too!

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Securities offered through Triad Advisors, Member FINRA / SIPC.  Advisory Services offered through Planning Solutions Group, LLC.  Planning Solutions Group, LLC is not affiliated with Triad Advisors.  PSG Clarity is a division of Planning Solutions Group, LLC.