Implementing a Roth Retirement Plan for Federal Employees

By on December 27, 2010 in Current Events with 16 Comments

The Thrift Savings Plan Enhancement Act of 2009, Public Law 111-31, became a law on June 22, 2009. Among other things, it authorized the Thrift Savings Plan (TSP) to add a Roth 401(k) feature to the TSP. (See President Signs Tobacco Bill Implementing TSP Changes)

This benefit allows participants to contribute on an after-tax basis to their TSP accounts and receive tax-free earnings when they withdraw the funds (assuming certain criteria are met). As we noted at the time, it would be another year or two before the option became available. But, while changes like this move slowly, the change is now occurring.

The government has issued guidance for implementing this new option for federal employees.

Under this plan, a TSP participant will be able to invest after-tax salary into an account that will grow without any additional tax liability on future earnings. This is different from the current TSP in that income tax is paid when money is withdrawn from the TSP as the initial investment was made from pre-tax dollars. 

Readers who are seriously considering this option will want to read over the entire document on the plan but here are a few basic provisions about the Roth plans in case you missed them in earlier articles.

Roth contributions: 

  • Are made on an after-tax basis from basic pay.
  • May be made in addition to or in lieu of regular contributions and are subject to the elective deferral limit and must be combined with any regular contributions in determining whether the limit has been met. 
  • Agency Automatic (1%) and Agency Matching Contributions are always tax-deferred (as are their earnings). There is no differentiation between matching contributions associated with regular contributions and those associated with Roth contributions.
  • Are added to regular contributions when determining the percentage of pay being contributed for purposes of the Agency Matching Contribution formula. 
  • The same rules apply to Roth contributions as to regular contributions. You may designate any whole percentage or whole dollar amount of basic pay as Roth a contribution. This election may be in addition to or in lieu of an election to make regular (tax-deferred) contributions.
  • The law does not allow conversions of existing TSP regular balances to Roth balances.

 

For more information, including the forms to be used, you can download this document.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters onĀ federal human resources.

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