TSP Roth option a step closer

A new retirement savings option for federal employees is another step closer to reality.

The Federal Retirement Thrift Investment Board published draft rules on the implementation of a Roth 401(k) option to the Thrift Savings Plan in Wednesday’s Federal Register. The option would allow employees to invest income that already has been taxed in a Roth account in addition to contributing savings to their traditional TSP account.

The new Roth TSP component will invest an employee's after-tax earnings and cannot be taxed when withdrawn, similar to a traditional Roth IRA. There will be no income limits on earnings from TSP's Roth option as there are on a traditional Roth IRA, which could make the feature more attractive to federal workers and service members.

Federal employees should be able to enroll in the Roth option sometime between April and June, board officials said.

According to the draft rules, employees who choose the Roth option still will receive matching contributions from their agencies; those matching funds, however, will go toward their traditional TSP account balances. The Federal Register notice provides this example as explanation:

“Suppose a [Federal Employees Retirement System] participant elects to contribute 1 percent of his or her basic pay as a traditional contribution and 2 percent of his or her basic pay as a Roth contribution. The employing agency must contribute 3 percent of that employee’s basic pay to the employee’s tax-deferred balance as a matching contribution. Because the employee is a FERS participant, the employing agency must also contribute Agency Automatic (1 percent) Contributions to the employee’s tax-deferred balance whether or not he or she continues to make employee contributions.”

Agencies will continue to automatically enroll new hires into the TSP, contributing 3 percent of their basic pay, unless employees opt out. “The introduction of Roth contributions makes it necessary to establish whether default employee contributions are traditional contributions or Roth contributions,” the draft rules stated.

The Roth option is a “game changer” for younger federal employees in particular, Gregory Long, the board's executive director, said during a recent meeting. It could be a draw for young service members who often receive annual allowances of $20,000 to $25,000 a year and don't want to get hit with taxes if they withdraw their money. The Roth option is a more compelling sell, Long said at that time.

Feds can contribute up to $17,000 in tax-deferred money to the traditional TSP and the Roth option in 2012; a combined investment cannot exceed that amount. The Internal Revenue Service announced last fall that the cap on individual TSP contributions in 2012 would increase $500, from $16,500 to $17,000, as a result of the change in the cost-of-living index. The increase also applies to those who participate in 401(k), 403(b) and most 457 retirement plans. The catch-up contribution limit for those 50 and older remains the same, at $5,500.

The TSP website will have more information this week on the Roth option, officials said.

Public comments on the draft rules must be submitted by April 9, according to the notice.