Roth 401K for Thrift Savings Plan (TSP)

Good news for Thrift Savings Plan (TSP) participants – the Thrift Savings Plan will begin to offering a Roth 401(k) option in 2012. In June 2009, President Obama signed the the Thrift Savings Plan Enhancement Act 2009, Public Law 111-31 which gives the Thrift Savings Plan the authority to offer a Roth 401k option. It will take the agency some time to set up the infrastructure and bookkeeping capability, so the launch is not expected until 2012.

Update: the TSP Roth 401k option has been delayed and is now expected to be offered in the first calendar quarter of 2012 (the original date was 2011).

If you think that a Roth 401K TSP sounds like some sort of hybrid retirement plan then your guess would be absolutely right! The Thrift Savings Plan Roth 401K is actually a merger of two of the popular retirement plans currently available; the Roth 401K, and the Thrift Savings Plan.

The Roth 401K is typically used by individuals in the private sector and the Thrift Savings Plan is reserved for government employees, including those working for the government under civilian programs and the DoD, and for those in the armed forces. The Roth 401k Thrift Savings Plan puts the best part of both plans in one new retirement option.

What is the Roth 401k feature for the Thrift Savings Plan?

A Roth 401(k) feature for the Thrift Savings Plan combines the benefits of a Roth savings plan with the TSP retirement savings plan. Instead of making contributions before paying taxes like you currently do with the TSP (and paying taxes when you withdraw the money), you will pay taxes now and make tax free withdrawals in retirement. This means your Roth savings will grow without the drag of taxes because your contributions have already been taxed. You will not pay any federal income taxes on your withdrawals so long as you meet Roth withdrawal eligibility guidelines – typically age 59½ and have been making Roth contributions for a minimum of 5 years.





TSP Roth 401k eligibility

Another benefit adopted from the Roth 401K plan is an absence of income limitations for plan participation. Anyone can contribute towards this retirement plan regardless of how much money they make. This differs from Roth IRA contribution limits which are tied to income. The TSP Roth 401k contribution limits will be the same as all TSP contribution limits, regardless of whether you invest in the Roth option or the traditional option. Contribution limits can be found here.

Benefits Associated with the Roth 401K

Here are some benefits you should expect to see with the Roth 401k plan:

  • Contributions are made after taxes have been withdrawn.
  • There are no taxes on withdrawals from a Roth 401K so long as you meet withdrawal eligibility requirements.
  • There are no income restrictions on regarding who can contribute to a Roth 401K, so you can contribute regardless of income level.

Deployed contributions to Roth 401k for TSP could be huge

I’m a big fan of investing in the TSP while deployed because of the tax benefits – you don’t pay income tax on the money you contribute and the portion you contribute while deployed can be withdrawn tax free, giving traditional TSP contributions similar rules to Roth 401k contributions. The difference is the tax free portion of your withdrawals will be prorated across all regular TSP withdrawals, and there are minimum distribution requirements. A Roth 401k feature will eliminate the necessity to track which portions of contributions and withdrawals are tax free, and there are no minimum distribution age requirements. This makes the Roth 401k TSP feature much more flexible. You don’t get taxed on income and you can make tax free withdrawals in retirement. It doesn’t get any better than that!

Should you invest in the Thrift Savings Plan 401k option when it is available?

This could be a great opportunity to save some money with great tax benefits,though it may not be the ideal situation for everyone. You should look at your investment goals, tax obligations and other factors before making the decision to switch from the traditional TSP plan to the Roth 401k, or consider contributing to a hybrid approach and making a portion of your contributions to each plan so you can diversify your tax liability in retirement. Generally, if you are in a low tax bracket, or you have tax free deployment income, then you might want to consider the Roth 401k TSP feature. If you are in a higher tax bracket and don’t have tax free income, then the tax situation should be similar to deciding whether or not you should invest in a 401(k) or IRA. The previous link should be helpful in making the decision. You might also consider doing a Roth in-plan Rollover, which will allow you to transfer some or all of your current TSP assets from a Traditional TSP investment to a Roth for tax purposes. There may be tax consequences of this, so be sure to look into it before you make the move when it becomes available to you.




Print Friendly
Date published: August 24, 2010. Last updated: February 19, 2011.

Article by

Ryan Guina is the founder and editor of this site. He is a writer, small business owner, and entrepreneur. He served over 6 years in the USAF and also writes about money management, small business, and career topics at Cash Money Life. You can also see his profile on Google

Comments

  1. One argument in favor of using the Roth option in the TSP is that, unlike many these days, Federal employees will actually have a pension — thereby increasing the likelihood of a high retirement tax bracket.

    • Very true, Mike. Though I don’t believe all govt. employees are eligible for pension plans and many don’t stick around to earn the full pension. But overall, a great idea for the vast majority of govt. workers and military members, especially those who will retire and receive a military pension.

  2. Jason Daniel says:

    Something I was looking for in this article that I was unable to find was the option to rollover the traditional TSP to the Roth option. Does anyone know if this is a possibility? What taxes would need to be paid, if any, on the conversion?

    • Jason, yes, you can roll a TSP into a Roth IRA. The taxes will depend on your tax rate and potentially on other factors. My recommendation is to contact a financial planner to assist you with this.

      • Ryan, thanks for the feedback . . . just to make sure we’re on the same page: I know my TSP can rollover into a Roth IRA . . . can it roll over to the Roth 401(k) TSP is what I was asking.

        • My apologies, Jason. I misinterpreted your question. I understood a rollover to mean taking your funds out of your account and rolling them into a new account (e.g. rolling over a 401k or TSP into another employer sponsored retirement plan or into an IRA).

          My understanding is that you can only recharacterize contributions when you are rolling over the funds from one account to another (either changing employers, or into a new account type). I am not sure if you can do it while you are currently participating in the plan.

          That said, I am not 100% certain about this situation and I’m not sure if there has been any official guidance regarding this issue since the Roth TSP hasn’t officially started yet. You may be able to change the status of the contribution in the same tax year it is made (not sure), but I don’t think you will be able to change contributions from previous tax years. I recommend contacting the TSP when the Roth TSP is activated, or consult with a tax professional.

  3. The Roth TSP start has been postponed until 2012. Didn’t the law require starting in 2011? How long can they delay the Roth TSP?

    • Ken, Unfortunately, I believe they can postpone it as long as they want if they are willing to rewrite the laws. The only recommendation I can make is to keep up with TSP news as it comes out.

  4. Scott Jones says:

    I am already maxing out my TSP per IRS rules at $16,500 per year as well as the $5,500 in catch up contributions. My question: How much can I contribute in after tax income to this new ROTH IRA TSP starting in 2012?

  5. michelle bryant says:

    Ryan, i have maxed out tsp at $16500 and maxed out catch-up at $5500 ($22,000). This is all pre-tax.Can i also now contribute to the new tsp roth?Correct me if i am wrong…is there a pre tax limit plus a post tax limit and what is that total amount that one can contribute?

    • Michelle, the new Roth 401k for the TSP has been delayed until 2012. However, you can only contribute up to the maximum limits across both accounts, so if it were available now, the answer would be no. That said, you can still contribute to a Roth IRA if you fall within income limits. Here are some recommended places to open a Roth IRA.

  6. Will I be able to continue to max out my current Roth IRA ($5000) and max out a Roth 401k IRA ($16500)? Will my contributions toward that Roth 401k effect my Roth IRA in any way? Also, while I am deployed, I understand that contributions are not taxed in my TSP, however, I am trying to understand how my contributions while in a tax free status effect my Roth IRA. My question is, Are my contributions to a Roth IRA ,while in tax free status, considered “tax free contributions” only because my income is not taxed?

    • Great questions, Justin. Yes, you can contribute to both a Roth IRA and a Roth 401k for the TSP – the limits are still the same. Your Roth IRA contributions while deployed will also be tax free because your income is tax free. Here are some articles which may be helpful in understanding how it works: investing while deployed, and the Heroes Earned Retirement Opportunities (HERO) Act, which allows military members to contribute to IRAs when all of their income is from a tax free zone. Best of luck and thanks for your service!

  7. Ryan,
    If I already contribute to the current TSP and also have a Roth IRA with a company such as Edward Jones, will I have an option to open the TSP Roth when it becomes available? I am wondering if there is a rule about having two Roth IRA’s or is it considered different since its offered by TSP. Thanks

    • Clint, the TSP Roth 401k and a Roth IRA are separate investments with separate maximum contribution limits. You can have both investments so long as you meet eligibility requirements. You should already meet the TSP eligibility requirements, and here is more information about Roth IRA eligibility. So to answer your question, if you are already eligible for the TSP, then you would also be eligible for the Roth TSP.

  8. Ryan,

    Thanks for all the useful information regarding the TSP Roth 401(k). Just to make sure I understand its relationship to the traditional TSP, will we be allowed to contribute to both the TSP Roth 401(k) AND the traditional TSP? In other words, will we be able to put $16,500 in tax-deferred investments (TSP) and $16,500 the Roth 401(k) as well, to total $33,000 a year? The traditional Roth IRA had a contribution limit of $5,000 (to be adjusted for inflation), but according to an interview on Federalnewsradio.com the member of the board governing the TSP stated that the maximum would be $16,500 for the TSP Roth 401(k), but didn’t specify if you could do both the TSP Roth 401(k) and the TSP at $16,500 each. Thanks again.

    • Steve, you can contribute to both accounts, but the limit is a total of $16,500 in all. So you can mix and match as long as you don’t exceed the $16,500 limit. So $8,250 in each, $10k in one, $6,500 in the other, or any combination that doesn’t exceed the limit.

  9. Ryan,
    This is similar to Jason’s question above. I have tax-exempt contributions sitting in my military TSP account from 2010 and 2011 deployment time. I am wondering if there will be an opportunity to rollover/recharacterize/transfer/etc. tax-exempt funds from regular TSP to the new Roth 401(k) TSP in 2012. If not, those tax-exempt funds are subject to TSP withdrawal rules/penalties and my understanding is the earnings are eventually taxable later on. I would like to get those contributions “relabeled” as Roth contributions so the earnings are tax-free as well and the original contributions are available to me prior to 59 1/2 (without penalty, like a Roth IRA). Per your reply to Jason, I understand nothing is official yet, just wondering if there is any talk on this particular subject. Thanks.

    • Kristi, That would be the ideal solution if it is allowed. The long term tax benefits on the earnings could make a substantial difference in your retirement portfolio. Unfortunately, I haven’t read any official wording on this situation, so I don’t want to give unverified information. When the Roth TSP officially launches I will try to write some updates to this article so people will have a better idea of what to expect if they are in a similar situation.

Speak Your Mind

*