LANGLEY AIR FORCE BASE, Va. –
Instead of being taxed on the Thrift Savings Plan after retirement, at a possible higher rate, federal civilian employees and members of the uniformed services will have the option to convert to a Roth TSP beginning in October 2012.
The TSP is a retirement savings plan, similar to 401(k) plans offered by many private employers. It is a defined contribution plan, meaning the retirement income an individual receives all depends on how much they put into the account during their work years, and the earnings accumulated over that time.
Darlene Morgan is the personal financial management program manager at the Airmen and Family Readiness Center. She said traditional TSP contributions are made on a pre-tax basis. A participant defers paying tax on the contributions until the funds are withdrawn. With the Roth option, taxes are paid on the funds when they are first contributed.
Individuals are able to make tax-free withdrawals after certain stipulations are met; the first Roth contributions have been in the account for at least five years, and the individual is at least 59.5 years old. Withdrawals can also be made without penalty if the five year mark is met, and the individual becomes disabled or passes away.
"For any member, deciding to use the Roth TSP option depends on where you are financially, and what your financial goals are for the future," said Morgan. "It all depends on your marginal tax rate, whether you need the tax advantage now or in the future."
An individual's marginal tax rate is based on their income. The marginal tax rate for an individual will increase or decrease as their income rises or falls. With the addition of the Roth TSP option, participants can choose to invest pre-tax or after-tax dollars in any of the TSP funds, up to the Internal Revenue Code limits.
According to the official TSP website, TSP participants can currently invest in ten different funds:
· Five Lifecycle (L) Funds, which use professionally determined investment mixes tailored to meet an individual's investment objectives, based on various time goals.
· Government Securities (G) Fund, which produces a rate of return that is higher than inflation, while avoiding exposure to credit risk and market price fluctuations.
· Fixed Income Index Investment (F) Fund, which matches the performance of the Barclay's Capital U.S. Aggregate Bond Index that represents the U.S. bond market.
· Common Stock Index Investment (C) Fund, which matches the performance of the Standard and Poor's 500 Index that is made up of 500 large to medium-sized U.S. companies.
· Small Capitalization Index Investment (S) Fund, which matches the performance of the Dow Jones U.S. Completion Stock Market Index that is made up of stocks of U.S. companies not included in the S7P 500 Index.
· International Stock Index Investment (I) Fund, which matches the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.
When deciding which funds to invest in, individuals should keep in mind that Roth TSP elective deferral limits are $17,000 for regular contributions and $5500 for catch-up contributions, which is identical to traditional TSP limits.
For more information or questions concerning the TSP, members can visit www.tsp.gov, which gives a comprehensive overview of the TSP, and both the Traditional and Roth options.
"Anyone at the Airmen and Family Readiness Center can sit down with a member and give you educational information," said Morgan. "For more personalized information, the member should go to the website, or talk to a certified financial planner at their local bank or credit union."