This May the Thrift Savings Plan is launching a new investment option that provides more flexibility for TSP participants. Federal employees and military members will be able to allocate their contributions between a Roth and the traditional plan shortly. The flexibility is in the tax treatment of the employee’s contributions and it may be beneficial to look closely at this option. A Roth is one of the very few investments that all capital gains, dividends and interest are 100% tax free if held in your account for 5 years. I converted one of my retirement accounts to a private sector Roth a year ago to take advantage of the long term tax advantages and my Roth IRA has gained 23%; all of the gains, if withdrawn after 5 years, will be tax free.
The down side is that your Roth contributions are taxed as regular income unlike the tax deferred traditional TSP contributions. Fortunately you don’t have to opt for one or the other. You can allocate your contributions in whatever percentage you desire to either option.
There is much to consider before deciding on whether or not a Roth is right for you. You will either pay taxes now for Roth accounts or defer them until retirement with a traditional TSP account. Other Roth advantages are that you don’t have to take a minimum distribution at 70 1/2 like your must take with the traditional TSP account, and your heirs inherit the account tax free if the account was open for at least 5 years.
If you believe you will be in a lower tax bracket when you retire the traditional plan may be your best option. The problem is that we don’t know what future tax rates will be and an incorrect assumption now could cost you big time down the road. Remember the old adage: don’t keep all of your eggs in one basket. I subscribe to that philosophy. If they would have had a Roth available when I was still working in government I would, even at my age, placed a portion of my contributions in a Roth.
Situations are different for everyone. Whether you would be better off making traditional or Roth contributions depends on your income tax rate now and in the future and other factors. For example, you might benefit from making Roth TSP contributions if:
- You are in a low tax bracket now, but think your tax rate may be higher in retirement. With Roth, your contributions are taxed at your current lower rate, and you avoid paying taxes at the expected higher rate in the future.
- You are not in a low tax bracket now, but anticipate that your marginal Federal tax rate will increase in the coming years.
- You want tax diversification and see an advantage in making after-tax contributions so that you can have tax-free withdrawals in retirement.
Many savvy investors prefer Roth IRAs. Active managers strive to achieve substantial tax free retirement income by making prudent and timely investment decisions.
For more information on Roth TSP options click on the following links:
- TSP Roth Features
- Comparison between Roth and Traditional TSP accounts
- Roth TSP Characteristics
- Signing up for Roth Contributions
- Converting a TSP Account to a Private Sector Roth Account
Updates
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- Retirement Savings – My daughter is going on vacation this summer and was having a difficult time finding reasonable car rentals. The best deal she could find was $350 for a weekly rental fee until she bid $220 for a car rental and won the bid for a savings of just under 40% on the Priceline site! I added a link to the Priceline online bid service to our list of other ways to save in retirement.
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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.
Great information and linkage concerning TSP Roth’s. I am one of those who are 5 years away from retirement. I am weighing the pros/cons of TSP Roth investment right now. Didn’t know that the roll-out was not going to happen until May. I thought it would be sooner. Thanks for sharing!!