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Federal Employees News Digest : Oct. 1, 2012
October 1, 2012 Vol. 62, No. 12 7 Visit us on the Internet at www.FederalDaily.com At many federal agencies, the Roth Thrift Savings Plan (TSP) option started May 7, 2012. Employees at other agencies and members of the uniformed services were allowed to start contributing to the Roth TSP on July 1. Effective Oct. 1, employees at all federal agencies can contribute to the Roth TSP. This column reviews some of the rules for the Roth TSP, including how much employ- ees can contribute between now and their last pay date in December 2012. Before discussing which employees may be good can- didates for contributing to the Roth TSP, it is important to review some rules regarding the "traditional" TSP that has existed since 1986, as well as rules for the recently started Roth TSP. The following summarizes the two accounts. Contributions via payroll deduction: • Traditional TSP contributions are deducted from gross (before-tax) salary. • Roth TSP contributions are deducted from after-tax salary. • The same fund choices (C, S, I, F and G Funds, and Lifecycle Funds) are available in the traditional and Roth TSP. Paychecks: • Traditional TSP: Federal and state income taxes on salary contribu- tions are deferred, resulting in fewer taxes taken out of one's paycheck. • Roth TSP: Federal and state income taxes are withheld on salary con- tributions, resulting in less of a net paycheck compared to traditional TSP contributions. Transfers in: • Traditional TSP transfers allowed from eligible employer-plans and traditional IRAs. • Roth TSP transfers allowed from Roth 401(k), Roth 403(b) and Roth 457(b) retirement plans. Transfers out: • Traditional TSP transfers out allowed to eligible employer-sponsored retirement plans such as 401(k) plans, to traditional IRAs, and to Roth IRAs. • Roth TSP transfers out allowed to Roth 401(k), Roth 403(b) and Roth 457(b) retirement plans, and to Roth IRAs. Withdrawals: • Traditional TSP is taxable when funds withdrawn. • Roth TSP contributions are withdrawn tax-free. The earnings are tax- free when withdrawn, provided: (1) Five years has passed since the Jan. 1 of the year a participant made his or her first Roth TSP contribu- tions; and (2) the participant is age 59.5 or older, permanently disabled or deceased. An important consideration for the Roth TSP is that there are no income or age limitations for contributing. This is unlike the Roth IRA, in which there are adjusted gross income (AGI) limitations. That means that those employees who have not been able to contribute to the Roth IRA through the years as a result of having too large an income are still eligible to contribute to a Roth TSP account. But employees will only be able to contribute to the Roth TSP if they are employees. Departing or retired employees may not contribute to the Roth TSP. The question therefore becomes: Is contributing to the Roth TSP the most appropriate choice for employees? Generally speaking, the Roth TSP might be appropriate for those employees who expect their marginal tax bracket to be higher in retirement than it is while they are employed and contributing to the TSP. But like many things with respect to taxes, things are never simple. When contributing to the Roth TSP, there is no reduc- tion in an employee's gross salary and adjusted gross income as there is when an employee contributes to the traditional TSP. Contributing to the traditional TSP could result in lowering the employee's current tax bracket, and with some employees, could affect whether the employee will be eligible to take certain tax deductions and credits for the current tax year. In particular, if an employee's current adjusted gross income is too large, the employee may lose eligibility to take certain tax credits in the current tax year. Among these credits are the child tax credit and the American Opportunity tax credit. Employees should consider these factors when they decide on making Roth TSP contributions. If employees have any questions, they should consult a qualified financial or tax advisor. Some additional information about the Roth TSP: TSP transactions and Roth money. If an employee makes Roth contri- butions or transfers Roth money into a Roth TSP account, the employee will establish a Roth TSP account. Traditional and Roth TSP money must be kept separate for tax purposes. But the two "pots of money" make one TSP account balance. Any transactions an employee makes, including inter-fund transfers, contribution allocations, loans, beneficiary designa- tions and withdrawals, will apply in equal proportions to the Roth and traditional balances. Roth TSP and required minimum distributions (RMDs). RMDs will apply to Roth TSP monies and to those Roth TSP participants age 70.5 and who have retired from or have left federal service. Roth TSP contribution limits. An employee's combined traditional and Roth TSP contributions cannot exceed $17,000 ("regular" contribu- tions). As of Dec. 31, 2012, those employees age 50 and older will be able to contribute a combined traditional and Roth TSP maximum of $5,500 in "catch-up" contributions. For more information about the Roth TSP and how it operates, employees are encouraged to obtain the updated 1105 Media publication, "Your Thrift Savings Plan", available for purchase and download at www. federaldaily.com. Note to subscribers: Informed Investor's four-part series on life insurance will resume in the Oct. 8 issue of FEND. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor All employees, service members now may contribute to Roth TSP
Sept. 24, 2012
Oct. 8, 2012