Roth TSP: More Questions and Answers

November 6, 2012
Originally published in our May Newsletter
by Miriam Darden Settles, CFP®
Federal Retirement Thrift Investment Board

The TSP began accepting Roth contributions on May 7, 2012. Last month’s TSP article provided you with the basic information about the Roth option. This month’s article delves further into Roth and addresses issues that may affect you as military service members in particular.

A Roth recap

Roth offers you flexibility in 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.[1]

How is the Roth TSP different from a Roth IRA?

It’s important to understand that Roth TSP is not the same as a Roth IRA. Among the key differences:

With Roth TSP, there are no income restrictions that prevent you from making contributions. If you are eligible to contribute to the TSP, you are eligible to make Roth TSP contributions.

Roth TSP contributions are subject to different contribution limits. In 2012, you can contribute up to $17,000 (plus $5,500 if you are 50 or older) to your Roth TSP,[2] while you can only contribute $5,000 ($6,000 if you are 50 or older) to a Roth IRA.

If you are eligible to contribute to a Roth IRA, making Roth contributions to your TSP account will not affect your Roth IRA contribution limits. However, switching from traditional contributions to Roth contributions may affect your eligibility to contribute to a Roth IRA because, unlike traditional contributions, Roth contributions do not reduce your taxable income. Therefore, you should verify that you are within the IRS income limits if you want to contribute to a Roth IRA.

Does Roth change any of my existing TSP benefits?

No. The existing rules still apply to TSP loans and in-service withdrawal eligibility. And you’ll still have the same withdrawal options after you separate from military service. However, it’s important to know that if you have a traditional (non-Roth) TSP balance and a Roth TSP balance, you can’t just tap one of those balances when you make your loan or withdrawal request(s). All loan and withdrawal amounts will come out of your TSP account in proportional amounts.

You will still be able to transfer money between the TSP and an IRA or other eligible employer plans subject to certain rules. Please visit the TSP website for more information.

What happens when I deploy to a combat zone?

If you chose to make Roth contributions when you completed your TSP election using myPay (or Form TSP-U-1), then the tax-exempt pay that you earn while serving in a combat zone will be made to your Roth balance in the percentages that you indicated on your election.

But be aware that Roth TSP contributions are subject to the IRS elective deferral limit ($17,000 for 2012) even if they are contributed from tax-exempt pay. You should understand that if you are making Roth contributions from tax-exempt pay, your contributions will be terminated upon reaching that limit. Furthermore, if you want to contribute tax-exempt pay toward the annual additions limit ($50,000 for 2012), you will have to elect traditional (non-Roth) contributions for any amount over $17,000.

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.

Where can I find more information?


You can always find the most up-to-date Roth information on the TSP website, www.tsp.gov.

[1] The IRS has two requirements that must be met in order for Roth earnings to be tax-free when withdrawn: (1) 5 years have passed since January 1 of the calendar year when you made your first Roth TSP contribution and (2) You have reached age 59½, have a permanent disability, or have died.

[2] The combined total of Roth and traditional contributions cannot exceed these limits.

 

Tip of the Day

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