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.