5 things feds should know about Roth TSP

Friday - 5/4/2012, 4:10pm EDT

The Thrift Savings Plan's Roth option rolls out today. The Federal Retirement Thrift Investment Board has been preparing for the new program for two years now, but despite the big push today many federal employees will actually have to wait to enroll in the new program. One of the largest federal payroll processors needs more time to upgrade its systems in preparation for the Roth option.

Find information about which agencies are affected, as well as the five things feds should know about the Roth TSP below.


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What is the Roth TSP? The Roth option allows federal employees to contribute after-tax dollars toward their retirement-savings accounts. Under the traditional TSP, feds invest tax-deferred dollars into their accounts, meaning the money isn't taxed until it's withdrawn.

Employees will be able to invest in both plans, but the combined contribution cannot exceed the 2012 limit of $17,000. Roth participants will still be eligible for the matching contribution from agencies, however, the matching contributions — 1 percent automatically and 4 percent in actual matching — will only be deposited in the traditional TSP account.

"This is the case even if the employee contributes only to the Roth TSP," said Ed Zurndorfer, a federal benefits expert.

Automatic enrollment in the TSP, which currently directs 3 percent of employee pay automatically to the TSP, unless employees opt out, will continue. But the default contributions will continue to go toward the traditional TSP unless feds specify otherwise.

Also, even after an employee joins the Roth option, money already in his or her account, will stay invested in the traditional TSP balance, and employees will not be able to convert it to the Roth option.

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May 7 launch date will leave many feds out. Despite the official launch date today, many employees will be unable to participate right away. Because the Roth option involves already-taxed income, the Federal Thrift Investment Board and agency payroll processors will have to separately account for the various contributions, adding another layer to complex payroll structures.

The Defense Finance and Accounting Service (DFAS), which also acts as a processor for some civilian agencies, said last month it would be forced to "phase in" the Roth option rather than a full-scale launch today.

Below, is the the Roth rollout schedule for agencies covered by DFAS' payroll processing:

June

July

October

  • Marine Corps
  • Veterans Affairs
  • Health and Human Services
  • Executive Office of the President
  • Environmental Protection Agency
  • Broadcasting Board of Governors
  • civilian DoD employees
  • Army
  • Navy
  • Air Force

The Interior Department told Federal News Radio last month its payroll services would be ready for today's launch.

Kim Weaver, the director of external affairs at the investment board, said the first thing feds should do is find out if their agency is ready to process Roth TSP contributions.

If so, some employees will be able to sign up online while some will have to file a paper form, depending on the agency. Civilian employees will use the form TSP-1, while members of the uniformed services will have file using form TSP-U-1. Both are available on the TSP website.

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Considering Roth TSP?

Employees near retirement may not want to contribute to the Roth TSP since this money needs to remain in the account for 5 years and until you are 59 ½ years old to avoid paying taxes on the distribution of the Roth earnings. If you are planning to take a withdrawal from the TSP before you are 59 ½ (as you can do with the traditional TSP without penalty if you separate at age 55 or later) and/or before your first contribution has been invested for 5 years, you will defeat the purpose of contributing to the Roth TSP since you will not be permitted to designate your withdrawal only from the traditional TSP balance. — Tammy Flanagan, senior benefits director, NITP

Who could benefit from the Roth TSP? Many financial analysts consider the Roth option a good deal for employees who anticipate they'll be in a higher tax bracket in retirement than they are presently. This means the Roth option could be particularly beneficial for younger federal employees.

"The biggest advantage to Roth TSP participation is that all qualified withdrawals from a Roth TSP account will not be subject to federal and state income taxes," Zurndorfer said.