Military personnel and federal employees will pick up another valuable employment benefit in Spring 2012 with the introduction of the Thrift Savings Plan’s Roth 401(K), a new investment option designed to help build a tax-free income stream for retirement.
The Thrift Savings Plan Enhancement Act will allow Thrift Savings Plan (TSP) participants to contribute to a Roth 401(k) option beginning in April. Investors will be able to make after-tax contributions in exchange for tax-free withdrawals in retirement. (Participants must be at least 59 ½ years old and have been making Roth contributions for a minimum of five years in order to qualify for those penalty and tax-free withdrawals.)
That’s a big change from the current TSP options, which call for participants to make pre-tax contributions and then pay taxes when they withdraw the money. TSP participants will be able to contribute to the Roth 401(k) option regardless of how much money they make. And the maximum allowable contribution for the TSP Roth option will be the same as it is for the regular, pre-tax version of the TSP.
Should you invest in the TSP Roth 401(k) option? Before making a decision, you’ll need to carefully consider your investment goals, tax status and even your personal preferences. However, there are particular groups of people who would benefit more from participating in the Roth option. Prospective candidates for the Roth 401(K) option include those who:
- Believe they’ll be in a higher tax bracket in retirement.
- Want to diversify tax risk in the face of uncertain future tax rules.
- Are younger employees.
If you like the idea of making tax-free withdrawals in retirement but don’t want to wait until April 2012, then consider opening a Roth IRA now.
Roth IRA investors can choose from a wide universe of investments – considerably wider than the relatively narrow selection of funds that will be available in the TSP Roth 401(k) option. Additionally, you may make contributions at any time and at any age. For the 2011 tax year, you can contribute $5,000 (or $6,000 if you’re 50 or older) provided you meet modified adjusted gross income and tax filing status requirements.
For those of you enrolled in FERS, one investment strategy may be to maximize the match from your agency and then funnel extra retirement dollars into a Roth IRA. Remember: FERS participants should contribute at least five percent of their basic pay to their TSP — before considering other investments — to take full advantage of Agency Automatic and Agency Matching Contributions.
Want to learn more about your Roth IRA options? Check out the First Command/Federal Times webinar “The Roth Option: Make It Work for You Now.” Meanwhile, First Command is ready to help. Your Financial Advisor can help you review eligibility requirements, contribution limits and other Roth IRA regulations so you can determine whether a Roth IRA is right for you.
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