TSP Rolls out Roth in May

by Miriam Darden Settles, CFP®
Federal Retirement Thrift Investment Board

Roth:  What’s it all about?

Simply put, Roth is all about options when it comes to the tax treatment of your TSP savings.  If you decide to make a Roth TSP contribution, the amount that you contribute comes out of your pay after-tax rather than before-tax as it does now.  That means that when you take withdrawals from your Roth balance, your Roth contributions come out tax-free because you’ve already paid the tax on them.  Not only that, but the earnings on those contributions are also tax-free provided you meet two basic Internal Revenue Service (IRS) requirements.*

Contrast that with the traditional (pre-tax) contributions that are made today.  Those contributions give you a tax break now because they come out of your pay before tax, and they grow in your account tax-deferred.  But when you withdraw your money, you pay taxes on both the contributions and their earnings. 

Is Roth right for you?
It depends.  If you are in the early years of your career and you expect your income to increase over time, paying the tax now on your TSP contributions might make sense.  If you expect tax rates to increase in general, or you think your own tax rate will be higher when you are in retirement, prepaying taxes now might be an option worth considering. 

If you are making contributions from tax-exempt pay earned in a combat zone, you have even more to think about.  Specifically, you are not paying upfront taxes on those contributions.  If you elect Roth, the earnings on those contributions will be tax-free when you withdraw them (as long as you satisfy the IRS requirements mentioned earlier).  If you elect to make traditional contributions from tax-exempt pay, the earnings on those contributions will be taxed when withdrawn.  

Furthermore, if you are age 50 or older and deployed to a combat zone while making catch-up contributions, you will be able to continue these contributions if they are Roth.  This is important to keep in mind because you can’t make traditional (non-Roth) catch-up contributions from tax-exempt pay.

You should know that Roth may not be for everyone, and there are other factors that you might want to consider.  We’ll be providing more information soon to help you make your own determination. 

How will you sign up?

You will elect to make Roth contributions in the same way you have always elected
traditional TSP contributions — using either your service’s electronic system, or Form TSP-U-1, Election Form.  If you are eligible for catch-up contributions, be aware that myPay does not allow for catch-up contributions, so you must complete Form TSP-U-1-C, Catch-Up Contribution Election. 

Right before the Roth feature is introduced, the TSP will provide more information on the website.  For now, we’ve created a special Roth page that’s linked from the banner at the top of the home page.  All the information published to date can be found at this location, including an informative video clip about the new Roth option.  We’ll soon have a Roth decision tool on the site to help you test the value of Roth TSP for you.  Also, look for the April issue of the TSP Highlights newsletter where you will find more details about Roth.

*The IRS has two requirements that must be met in order for Roth earnings to be tax-free when withdrawn: 1) you must have been making Roth contributions for five years or more and 2) you have reached age 59 1/2, have a permanent disability, or have died.

Next month:   Answers to specific questions about Roth TSP.

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