After announcing the effective date for the Roth TSP feature, readers asked a number of good questions about how such an account would work. The Thrift Savings Plan has provided answers to some of these frequent questions. We hope this will help those readers who are wondering about the advantages and disadvantages of opening up a Roth TSP account.
Is A Roth Account Right for You?
First, as with most federal tax issues, this topic will get complex for some readers for a variety of reasons. Each individual should check with your qualified financial or tax advisor to find out of a Roth account is the right financial move for you in planning for your retirement.
In general, a Roth TSP may be beneficial to you if you think your tax rate will be higher after you retire than it is now. For example, if you plan on working in another job after you retire from federal service, your income tax bracket may be higher than it is now. And, of course, there is no guarantee that the current tax brackets established by law will remain in effect and they could go up (or, some would say, the tax brackets are likely to go up).
Also, keep in mind that when you make a Roth contribution, this does not reduce your adjusted gross income as occurs when you make a regular TSP contribution. This fact could impact your current tax liability as it may impact your federal income tax bracket and it could limit the tax deductions and credits you are eligible to receive.
While we have covered this point in previous articles here is a reminder: one of the biggest differences between a Roth account and a traditional TSP account is that you will pay taxes on your Roth contributions as the money goes into your new Roth TSP account. This is different from the traditional pre-tax TSP contributions because, with those contributions, your contributions are deducted from your paycheck before you pay income taxes. With a traditional TSP, you are taxed when you withdraw the money. You will also owe taxes on your traditional TSP earnings when you withdraw the money. (Also see Is the Roth TSP Right for Me? and 10 Potential Mistakes To Avoid When Considering Retirement)
On the other hand, when you withdraw your Roth contributions and the earnings you have accumulated in your Roth account, you do not have to pay additional taxes as long as you meet IRS requirements.
Can I transfer money into the TSP from Roth IRAs or from my existing TSP account into a Roth?
You cannot transfer money into the TSP from Roth IRAs. Also, you cannot convert money that is already in your TSP account into a Roth TSP account.
Also, your agency’s automatic and matching contributions will continue to be traditional, tax-deferred contributions even if the new contributions you are making are only into a Roth account. You will not be able to convert agency traditional contributions into Roth contributions.
Your new Roth account can be funded by transfers from a TSP Roth account, from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s. And, of course, for most people your new Roth TSP account will be funded from your future pay after you notify your agency that you want to begin making Roth TSP contributions.
Who Can Take Advantage of the Roth TSP?
Active employees can take advantage of the Roth TSP. This is true whether you are under the FERS or CSRS retirement systems or if you are a member of the uniformed services. These qualified employees can also make a Roth transfer into the TSP from eligible plans as outlined above.
You cannot make new contributions to a Roth TSP account if you are separated from federal service, you are a federal retiree or a “beneficiary participant.” Note that while a beneficiary participant may not add new Roth contributions, your account may contain Roth contributions made by your deceased spouse.
TSP Transactions and Your “Roth Money”
You will have a “Roth balance” in your Thrift Savings Plan when you make Roth contributions or when you transfer Roth month into your account. This means that your TSP will show two balances: Your Roth balance and your traditional TSP balance. This is necessary as, explained above, the tax treatment is different for each type of account.
Here is one “catch” that will surprise some readers who are setting up a Roth account. According to the TSP, you will not be able to make an interfund transfer using only money from one type of account. For example, if you want to transfer money into another TSP fund, you cannot just transfer money from only your traditional or only from your Roth TSP account.
Any transactions you make will apply in equal proportions to the Roth and traditional balances. This is true whether you are doing an interfund transfer, withdrawing money, making a contribution allocation, taking a loan or making a beneficiary designation. The example used by the TSP assumes you have $100,000 in your Thrift Savings Plan with 10% ($10,000 in a Roth TSP account) and 90% ($90,000 in a traditional account). If you do an interfund transfer to put 10% of your account in the G fund and 90% in the C fund, this is what will happen:
Interfund Transfer: 10% G Fund, 90% C Fund
|$10,000 Roth TSP Balance||$90,000 Traditional TSP Balance|
$1000 (10% of your balance) transfers to G Fund
$9000 (90% of your balance) transfers to C Fund
$9000 10% of your balance) transfers to G fund
$81,000 (90% of your balance) transfers to C fund
We hope this will be helpful to you in understanding how your Roth TSP will be administered and that will help you in making a decision as to whether a Roth account is right for you in making plans for your financial security in retirement. We realize that many readers will have questions based on their unique situation. Please understand that FedSmith does not have the resources to answer the many individual queries we sometimes receive from readers. You will need to discuss your situation with a qualified financial advisor to make the best possible decision for your own situation.