A Tax-Free TSP Payout?

Is there a Roth IRA in your Thrift Savings Plan future?

Answer: It’s a possibility. And you should know the odds early next year. Definitely by June, 2009.

The Federal Thrift Investment Board, the folks that run your TSP, is conducting an exhaustive cost-benefit study on the pros and cons of offering federal and military investors a Roth option within the TSP.

Roth IRAs are funded with after-tax money. What that means is that when you start withdrawing money from the Roth, you get it all. It is tax-free. In theory, if you invested say $10,000, got very very lucky and made $1 million, you could withdraw the entire one million bucks without paying Uncle Sam a nickel.

Roths are very, very attractive for some people. Especially young investors who have a long, long time to invest (and hopefully see that investment grow) and for whom a tax break later is worth more than a tax break now.

Greg Long, the executive director of the TSP says that “we are currently researching all pros and cons (and there are several of each) of adding a Roth feature to the TSP. We expected to have a final recommendation to the Board in the first half of 2009. Legislation would be required to implement it!”

That is promising, but no guarantee it will be approved by the board and, if it is, that a tax revenue hungry Congress will go along with it.

The pros of the Roth are obvious, if you want one.

The cons are equally important. For one thing, it would require federal agencies to set up another channel of payroll deductions. But unlike the current TSP program, these would be fully-taxed contributions. Computers notwithstanding this would be a bookkeeping, logistical nightmare for some agencies. And it could – in fact definitely would – raise the administrative costs to the TSP. It’s current fees are the lowest, by far, of any 401(k) plan in the country.

Questions include who would pay the extra fees? Would they be assigned only to people using the option (another bookkeeping problem) or spread among the TSP? In other words would people who don’t, or can’t (because of income limits) have a Roth IRA have to pay for it for the people who do set one up.

The TSP’s executive director talked about the Roth option, along with other issues facing the federal 401(k) plan, on our Nov. 5 on our Your Turn with Mike Causey radio show. It’s been archived so you can retrieve it and listen to it at your convenience. This is a very big deal, potentially, for federal and military investors. It’s something you should be up on. Check it out. To listen to the show, click here.

Nearly Useless Factoid

Way down on the molecular level, the main ingredient in beef is corn. In fact, according to a new study reported on by National Geographic News, “out of the hundreds of meals that we bought, there were only 12 servings of anything that did not go straight back to a corn source.”

To reach me: mcausey@federalnewsradio.com

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