If one of your new years resolutions is to be smarter about money, maybe you should consider the Roth option of your Thrift Savings Plan? Ask yourself if, when you start tapping your TSP you’ll be glad you invested pre-tax, or do you wish you had taken the Roth option?
With a Roth, you invest after-tax money but when it comes time to collect it’s all yours. No matter how much you have in the account the IRS won’t get any of it.
A growing number of federal/postal/military personnel are opting into the Roth option. Many are younger, just starting out, and many are in a lower tax bracket. And while they could use the extra take-income now, they know about the magic of long-term investing, compounding and having a tax-free bundle when they retire and start tapping their TSP account.
We talked about the Roth option on the Oct. 15 version of our Your Turn radio show. It featured benefits expert Tammy Flanagan, a long-time fed now “retired” to Florida where she runs a business advising workers and retirees how to get the most out their careers. Last week’s show focused on the best dates to retire — and why — and how to design your own buyout. That show, like all Your Turn broadcasts, is archived as well as the accompanying column, so you can listen anytime — like now if you are taking time off.
Tammy answered many questions on the show but one came in too late to answer on air. A listener said that all of her money is now in the traditional tax-deferred TSP but she asked if she should switch to the Roth TSP. This should help a lot of people who are sitting on the investment, and it’s an example of the work that Tammy does for a fee, not free, every day:
In order to decide whether to make Roth contributions to your TSP for the remainder of your federal service, there are some things to consider:
With the TSP Roth versus TSP Traditional, it is a matter of “pay me now or pay me later” when it comes to taxes. Would you benefit more from the tax deduction now — use traditional pre-tax savings — or from having tax-free money later — then use Roth TSP.
You can choose between two tax treatments for your TSP contributions:
Traditional (pre-tax): You defer paying taxes on your contributions and their earnings until you withdraw them. If you are a uniformed service member making tax-exempt contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.
Roth (after-tax): You pay taxes on your contributions as you make them (unless you are making tax-exempt contributions), and your earnings are tax-free at withdrawal as long as you meet certain IRS requirements.
If you want to make contributions, you must submit a contribution election to tell your agency what portion of your pay you want to contribute and how you want to designate them between traditional and Roth. You cannot convert any portion of your existing traditional TSP balance to a Roth balance.
You can make both traditional and Roth contributions if you want. You can contribute in any percentages or amounts you choose, subject to IRC limits, and change your election at any time.
If you are Federal Employees Retirement System or Civil Service Retirement System, your agency/service matching contributions are based on the total amount of money (traditional and Roth) that you contribute each pay period. All agency/service contributions are deposited into your traditional balance.
Roth TSP is similar to a Roth 401(k), not a Roth IRA. There are no income limits for Roth TSP contributions. In order to make tax-free withdrawals from the Roth TSP, you have to wait five years from your first contribution.
Tax treatment of Roth money
When you withdraw your money, you will not have to pay taxes on any Roth contributions because taxes have already been paid. The earnings on Roth contributions are qualified (i.e., paid tax-free) when withdrawn if five years have passed since Jan. 1 of the calendar year in which the deceased participant first made a TSP Roth contribution.
If your Roth earnings are not qualified, you can continue to defer taxes on them by transferring your payment to a Roth IRA or Roth account maintained by an eligible employer plan.
Shifting your contributions from pre-tax to post-tax means you will be paying more income tax while you are employed. If you contribute the maximum, $19,000 + $6,000 (maximum TSP contribution for 2019) lowers your taxable income by $25,000 for 2019.
These are the marginal tax brackets for this year:
For unmarried individuals, taxable income over
For married individuals filing joint returns, taxable income over
For heads of households, taxable income over
Table 1. Tax Brackets and Rates, 2019
If that portion of your income is taxed at the 22% bracket, the tax savings on $25,000 is $5,500 per year or $458 per month. This is how much more you will pay in income tax on the federal level at that tax bracket, plus the amount you will also pay on the state level — an important consideration especially if you are at this income bracket or higher.
One of the earliest known Caesarean sections performed in which both mother and child survived was done by British Army surgeon James Miranda Steuart Barry, who was born Margaret Ann Bulkley. Barry was known as female in childhood and assumed a male identity both privately and professionally as an adult, partly to be accepted into the medical profession. Barry’s biological sex was not known until his death, and scholars have debated whether he was intersex or a transgender man. But what is agreed upon is the number of improvements he made to sanitation, water systems and conditions for the mentally ill.