February 8, 2012

Anticipated in the second quarter of this year, the Thrift Savings Plan (TSP) will soon begin offering all active federal employees and members of the uniformed services the option to designate some or all of their contributions as Roth contributions. The TSP Roth feature will give participants flexibility in the tax treatment of their contributions now and in the future.

How does Roth TSP compare to Traditional TSP?

Roth contributions are taken out of your paycheck after your income is taxed. When you withdraw funds from your Roth balance, you will receive your Roth contributions tax- free since you have already paid taxes on the contributions. You also won't pay taxes on any earnings, as long as you're at least age 59-1/2 (or disabled) and your withdrawal is made at least 5 years after the beginning of the year in which you made your first Roth contribution.

Traditional (pre-tax) contributions, which lower your current taxable income, give you a tax break today. They grow in your account tax-deferred, but when you withdraw your money, you pay taxes on both the contributions and their earnings.

Can Roth benefit you?

Everyone's situation is different. Whether you would be better off making traditional or Roth contributions depends on your income tax rate now and in the future. 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 are a uniformed services member making contributions from tax-exempt pay earned in a combat zone. If you elect Roth contributions, you will not pay taxes on either your Roth contributions or their earnings (as long as you satisfy the age and 5-year holding requirements mentioned earlier). [Tax-exempt contributions that go into your traditional and Roth balances are subject to the Internal Revenue Code 415(c) limit ($50,000 in 2012). However, only tax-exempt contributions that go into your Roth balance are subject to the elective deferral limit ($17,000 in 2012).]
• You want tax diversification and see an advantage in making after-tax contributions so that you can have tax-free withdrawals in retirement.
• You are age 50 or older and deployed to a combat zone while making catch-up contributions. You will be able to con¬tinue these contributions if they are Roth contributions. (You can't make catch-up contributions to your traditional TSP balance from tax-exempt pay.)

Comparison of Traditional (Pre-tax)
and Roth (After-tax) Contributions

 1 Roth contributions are subject to Federal (and, where applicable, state and local) income taxes, while traditional contributions are not
taxed until withdrawn. However, both Roth contributions and traditional contributions are included in the amount of wages used to calcu- late payroll taxes (e.g., Social Security taxes).
2 You would have to pay taxes on any pre-tax amount transferred to a Roth IRA.
3 Transfers to a Roth IRA from a Roth TSP are not subject to the income restrictions that apply to Roth IRA contributions.

Roth TSP is not a Roth IRA

Unlike a Roth IRA, there are no income restrictions on contributions to the Roth TSP feature. Any participant who is eligible to contribute to the TSP can make Roth contributions. Also, Roth TSP contributions are subject to different contribution limits than Roth IRAs. In 2012, you can contribute up to $17,000 (plus $5,500 if you are 50 or older) to your Roth TSP,* while you can only contribute $5,000 ($6,000 if you are 50 or older) to a Roth IRA. (If you are eligible to contribute to a Roth IRA, making Roth contributions to your TSP account will not affect your Roth IRA contribution limits.) [* The combined total of Roth and traditional contributions cannot exceed these limits.]

How does Roth TSP work?

• Money already in your account when you begin making Roth contributions will remain part of your traditional balance. You will not be able to convert it to Roth.
• The combined total of your Roth and tax-deferred traditional contributions in 2012 cannot exceed the elective deferral limit of $17,000, or the catch-up contribution limit of $5,500.
• Agency contributions will always be part of your traditional (non-Roth) balance.
• Any contribution allocation or interfund transfer will apply to the investment of both your Roth and traditional contributions or balances.
• You will be able to transfer Roth 401(k), Roth 403(b), and Roth 457(b) (but not Roth IRA) money into the Roth balance in your TSP account. Pre-tax transfers will continue to be placed in your traditional balance.
• You will be able to take loans, in-service withdrawals, and partial withdrawals from your account as before. They will come out of your account on a pro rata basis -- with a proportional amount from your traditional and Roth balances.
• When you withdraw your account, you will be able to separately transfer any portion of your Roth and tra¬ditional balances to IRAs or other eligible employer plans.

How will you sign up?

You will elect to make Roth contributions in the same way as you have always elected traditional contributions -- using either the electronic system of your agency or service, or Form TSP-1, Election Form (TSP-U-1 for uniformed services).

If you are eligible for catch-up contributions, you will use your agency or service electronic system or Form TSP-1-C (TSP-U-1-C for uniformed services). Check with your agency or service to find out whether your TSP elections should be made electronically or by using a TSP form.

Right before the Roth feature is introduced (anticipipated to be in the second quarter of this year), the TSP will provide more information on www.tsp.gov

Related Articles & Resources

·  The Thrift Savings Plan's New Roth Option (Part I)