If you are currently participating in the Thrift Savings Plan, then you have probably heard that a good thing just got better. The long anticipated Roth option for the Thrift Savings Plan was launched this week after several years of changes and delays. Unfortunately, not all branches will receive access to the Roth TSP on the same date, so this article wil cover a quick overview of how the Roth Thrift Savings Plan works, why it’s a great deal, and an update for the launch dates for DoD civilians and each branch of the military.
Roth TSP – Best of Both Worlds
I’ve gone on record several times as saying the Thrift Savings Plan is awesome for investors. There are a few downsides, but it’s almost all good for the average investor. The average investor won’t be able to find such a simple and easy to use investment plan, or one that offers lower management fees.
I’ve also mentioned that I love the Roth IRA and that everyone needs one. The primary reasons Roth IRAs are so valuable for investors is due to their long term tax benefits. You are able to contribute funds which have already been taxed at your current income level, then invest those funds and allow them to grow until you reach retirement age – then you can withdraw them tax free. Since most military members are in a relatively low tax rate, this is an incredible opportunity to pay a relatively low amount of taxes on your income, let compound for decades, and never pay taxes on it again.
The Roth TSP account offers the best of both worlds as it combines the benefits of a Roth IRA with the Thrift Savings Plan. You can contribute to any of the Thrift Savings Plan funds (which are best in class in terms of management fees), and enjoy the long term tax benefits of the Roth classification.
Roth or Traditional TSP?
There are pros and cons to each plan, depending on your tax bracket, long term investment plans, and other issues. A good place to start is with this primer which compares the traditional and Roth 401k, because the 401k plan and TSP have very similar rules. You can contribute to both the traditional and Roth TSP in the same year, as long as your combined contributions don’t exceed the TSP contribution limits.
Roth TSP Start Dates
The Roth TSP officially launched on May 7, 2012, but the first batch of participants won’t be able to contribute funds until June, while the remaining participants will not be able to contribute until October. DFAS officials decided upon doing a phased rollout for the Roth Thrift Savings Plan due to the complexity of the various civilian, active duty, and reserve pay systems, and to ensure they correctly classify each type of pay, including things such as incentive pay, bonus pay, special duty pay, etc.
According to DFAS officials, the Marine Corps will be the first group of servicemembers to receive access to the Roth TSP, starting in June. All DoD civilians are next in line, when they get access in July, 2012, and the Air Force, Army, and Navy service members will be able to contribute beginning in October 2012.
Other TSP Changes
Due to the addition of the Roth TSP option, the TSP officials created new forms for in-service and post-separation withdrawals. The new forms will be able to accomodate both the traditional and Roth TSP. TSP officials also consolidated the forms for use by both civilian and uniformed personnel (previously there were forms for each TSP plan). The old forms will not be accepted after June 1, 2012, so be sure to get a copy of the new form if you are planning on making any withdrawals in the near future.