The House recently approved a measure that will add a Roth option to the Thrift Savings Plan. This feature will be similar to Roth 401k plans and Roth IRAs – contributions are made after taxes are withheld from your paycheck, and withdrawals are made tax free in retirement.
The benefits of a Roth option for the TSP
Many military members start off their career in lower tax brackets because they often receive a large portion of their income as non-taxable military benefits. This allows military members to put away a lot of money that was taxed at a comparatively low rate – potentially lower than they would be subject to in retirement years. This can be a great way to save for retirement and practice tax planning at the same time.
Roth vs. Traditional. Here is a comparison between Roth and Traditional IRAs, which covers some of the pros and cons of investing with pre-tax and post-tax money, and how the distributions work.
Other proposals for the Thrift Savings Plan
Survivor benefits. Another change on the line is a survivor benefit change that would allow spouses of deceased TSP holders maintain the TSP accounts after their spouse passes away. Currently, surviving spouses or heirs must transfer the assets from the TSP account within 60 days of the member’s death. The funds must be transferred to an IRA, or be subject to early withdrawal penalties.
Mutual fund option. Another proposal would allow TSP participants to invest money held in their TSP account in private-sector mutual funds. This option will negate one of the best benefits of the Thrift Savings Plan, which is the extremely low cost ratios of the funds. It is very possible this section of the proposal will not pass.
The Thrift Savings Plan is improving
It’s good to see that government officials are working to improve one of the best financial benefits available to military members.