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Roth 401K for Thrift Savings Plan (TSP)
Leave a CommentThe Thrift Savings Plan will begin to offering a Roth 401(k) option in 2011. In June 2009, President Obama signed the the Thrift Savings Plan Enhancement Act 2009, Public Law 111-31 which gives the Thrift Savings Plan the authority to offer a Roth 401k option.
What is the Roth 401k feature for the Thrift Savings Plan?
A Roth 401(k) feature for the Thrift Savings Plan combines the benefits of a Roth savings plan with the TSP retirement savings plan. Instead of making contributions before paying taxes like you currently do with the TSP (and paying taxes when you withdraw the money), you will pay taxes now and make tax free withdrawals in retirement. This means your Roth savings will grow without the drag of taxes because your contributions have already been taxed. You will not pay any federal income taxes on your withdrawals so long as you meet Roth withdrawal eligibility guidelines – typically age 59½ and have been making Roth contributions for a minimum of 5 years.
Benefits. Here are some benefits you should expect to see with the Roth 401k plan:
- Contributions are made after taxes have been withdrawn;
- There are no taxes on withdrawals from a Roth 401K;
- There are no income restrictions on regarding who can contribute to a Roth 401K. You can contribute regardless of income level;
- The plan eliminates the necessity to track which portions of contributions and withdrawals are tax free;
- There are no minimum distribution age requirements
In Kiplinger’s July 2010 article, several professionals predicts that the stock market will provide a return of 7% to 8.3% on an annualized basis.
more.
Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP) is the federal government’s version of a 401(k) plan. It allows military service members and federal government workers to contribute a portion of their income each month on a pre-tax basis into mutual fund type accounts. These contributions then grow tax-deferred, allowing for substantial accumulation of retirement savings over time. Matching contributions up to 5% is available for civil-service employees. Matching funds to their TSP contributions is not available for those serving in the Armed Forces.
TSP is similar to a 401(k) plan because they are both employee sponsored and they are both defined contribution plans and tax deferred retirement plans. They also share the same annual contribution limits.
- Defined Contribution Plan: The TSP is a defined contribution plan, which means each TSP participant has their own individual account. The amount in their account is what has been invested by that individual, along with any matching contributions made by their employer. Increases or decreases in the value of the holdings, along with expenses and fees also determine the value of the account. Many civilians employed by the government are eligible to receive matching funds up to 5% of their total pay. Most military members are not eligible to receive matching funds of any kind.
- Tax Deferred Retirement Plan: Tax deferred retirement plans invest money from your paycheck before any taxes have been taken out. This money is then allowed to grow in an investment plan without the drag of taxes affecting the value of the funds. Taxes are assessed on the funds when they are withdrawn as qualified distributions during retirement.
- Contribution Limits: The Thrift Savings Plan follows the same contribution guidelines as the 401(k). Those who are age 50 or above can make an additional “catch-up” contributions.
- Loan Provisions: The TSP has very generous loan provisions, which allow service members to take loans from their account between $1,000 and $50,000 (depending on their account value). They can have up to two loans outstanding at any one time — a general purpose loan (usable to help purchase an auto or other necessity) and a loan to support the purchase of a principal residence. These loans have very low interest rates and the interest paid is credited to the account.
Investment Options: The Thrift Savings Plan has five main fund options. There is also a 6th fund, the “L Fund,” or Lifecycle Fund, which is a fund comprised of the 5 main funds and allocated for a target retirement date.
- The “G” Fund — Government Securities Fund (+ 4.62 percent)
- The “F” Fund — Fixed Income Index Fund (+ 6.39 percent)
- The “C” Fund — Common Stock Index Fund (- 0.94 percent)
- The “S” Fund — Small Cap Stock Index Fund (+ 4.86 percent since 5/2001 inception)
- The “I” Fund — International Stock Index Fund (+ 4.01 percent since 5/2001 inception)
The current “L” funds include L Income, L 2010, L 2020, L 2030 and L 2040. The L Income Fund is very conservative, with 80 percent being allocated to fixed income (Funds G and F) and only 20 percent stocks (Funds C, S and I). The L 2040 is a mirror image, being 80 percent stocks (Funds C, S and I) and only 20 percent fixed income (Funds G and F).
Very low overhead. The administrative expenses for all of these funds was a minuscule 0.03% per year ($0.30 per $1,000).
