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Presenters from the National Institute of Transition Planning, the federal leader in retirement planning seminars, take your calls and emails every Monday. Each week, the show focuses on a specific area of retirement planning from financial security, taxes, federal benefits and estate planning, to life after retirement and the latest rumors. Email your questions or call the show live at 202-465-3080.
The A-Z of the TSP
Monday - 5/14/2012, 3:00pm EDT
By Andrew Mitchell
Federal News Radio
Even though the federal government is offering its workforce a new option called the Roth TSP, one reality will not change: Sooner or later, you will still have to pay your taxes.
As Greg Long, the executive director of the Thrift Savings Plan, put it, "the choice is not if you pay taxes, but when do you pay taxes."
Long was a guest on the May 14 edition of For Your Benefit, which airs live Mondays at 10 a.m. on Federal News Radio.
Long pointed out that contributions to the "traditional" TSP, which has been in existence for about a quarter-century, reduce your taxable income for the year in which they are made and therefore constitute what he called a "pay-me-later design," when the funds are withdrawn from the traditional TSP.
The new Roth TSP reverses that order. "It says instead, 'pay taxes now on that money ... then you don't pay taxes on the way out,'" Long explained.
However, there are some caveats. If an employee withdraws from the Roth TSP before age 59 1/2 or if the funds haven't been in the Roth TSP for at least five years, taxes — only on the earnings — can be incurred.
What's in a name?
Long hastened to stress that the Roth Thrift Savings Plan, while similar in some respects, is not the same as a private-sector Roth IRA or a Roth 401(k).
"So many times we get questions that start this way: 'I can do x in my Roth IRA, why can't I do that in my Roth TSP?'" Long told For Your Benefit co-hosts Bob Leins and Tammy Flanagan. "And the answer is: they're different. The IRS rules they're built on are different."
That said, the show's participants, which included the TSP's director of external affairs, Kim Weaver, and its assistant general counsel, Laurissa Stokes, delved into a range of specific questions concerning the plan's new Roth option:
Is the TSP Roth option available to all federal employees?
"Anybody who has a TSP account can make Roth contributions," said Flanagan, who is the senior benefits director at the National Institute of Transition Planning, which sponsors the weekly show on Federal News Radio.
Long pointed out that with a Roth IRA, there are certain income limits. "If you make above $183,000 if you're married, then for sure you can't make a Roth IRA contribution," he said. If you work for the federal government, however, you can contribute to a Roth TSP account regardless of income, he explained.
When will my agency start allowing me to contribute to a Roth TSP?
"We are now open for business," Long said. "We are now ready to accept Roth contributions, but we're fully aware that some of those payroll agencies are ready to go right away and some of them have extraordinarily complex payroll systems that take a while to modify and won't be ready until July or September and, in some cases, October."
Long explained that there are well over 100 federal entities whose employees participate in the Thrift Savings Plan.
Flanagan suggested that federal employees check their own agency's payroll website or contact its payroll office. "They should be able to give you a better idea" as to when your agency will begin to offer the new option, she said.
How much can I contribute to my Roth TSP?
"It's still the same elective deferral limits," said Flanagan, "whether you're splitting it up between the two types of TSP or whether you're putting it all in one."
"The total dollars you can put in are no different now than they were last year," Long added.
For this year, the combined contribution to the plan cannot exceed $17,000 for participants under age 50 and $22,500 for those 50 and older. This means that, as your agency joins the Roth program, you can contribute no more than the difference between what you have already contributed this year to the TSP and the overall limit of $17,000. For example, if you have already put $8,000 in your traditional TSP account, you will be able to contribute no more than $9,000 to your new Roth TSP.
Another common question is that of fund allocation. For example, if an employee invests 50 percent of pre-tax dollars (the traditional TSP) into the G Fund and the remaining 50 percent in the C Fund, then the Roth investments (after-tax) must follow the same pattern.