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Saturday, December 4, 2010

ROTH TSP Option Slips to 2012

While not a surprise, it's disappointing that the TSP will not likely offer the ROTH TSP option until 2012. According to the Federal Times Newspaper the program will have to work out accounting and technological hurdles in 2011 in order to prepare for the roll out of the ROTH option in 2012. What's a shock to me is that the plan will spend $8 million in postage to advertise the plan! They should just reach out to blogs and Facebook!

6 comments:

Daniel said...

Any idea how TSP distributions will work for accounts containing pre-tax and post-tax contributions?

Brandi said...

Thanks for keeping us updated on this. What a bummer. I don't currently contribute to TSP, but I was planning on contributing once the Roth option opened up. The Roth 401k really is an ideal option for military folks who are low tax brackets thanks to tax free allowances and combat pay. In your opinion, do you think it is worth investing in the TSP to avoid the 15% tax bracket? I can only imagine that tax rates will rise in the future, even in the lower brackets, so I'm having a hard time deciding between tax deferred and taxable (after maxing out a Roth IRA).

Daniel said...

Brandi, it's definitely still worthwhile to contribute to your the tax deferred TSP before taxable account (for retirement purposes), even if you might be in a higher tax bracket upon retirement, because 1) you don't have to pay capital gains or dividends tax on your compounding assets over the life of your TSP, which for most people is 20-30 years; 2) the TSP offers a very unique set of investments, including the LOWEST cost index funds that you can find, even cheaper than vanguard (0.03% vs 0.07-0.40% expense ratios), 3) when you get out of the military you still have the option of rolling your TSP over to a Roth IRA or traditional IRA if you so desire. Having said that, I am also in the 15% marginal tax bracket and max both my roth IRA and TSP currently. When the Roth TSP comes out I plan to invest partly in tax deferred and partly in Roth TSP for tax diversification since it's hard to predict income taxes in 30 years.

Brandi said...

Thanks for the advice. The more I look into it, the more TSP is appealing to me because of how easy it is to manage. There's no taxes to worry about and it's so easy to allocate everything exactly how I want it. So you are still going to use the tax deferred TSP as well as the Roth TSP option? I know income taxes are hard to predict, but isn't it pretty safe to assume that they will be higher than 15% in 30 years?

Daniel said...

Certainly 15% is going to be hard to beat, so my plan is to go heavy on the roth while I'm still in the 15 or 25% brackets, and then add more tax deferred once I go over 25%. Additionally, if your spouse has access to a 401k/403b/etc they may not have a Roth option, in which case you might want to go full roth in your TSP, while also contributing to their plan -- depending on how much you can save each month.

Lee said...

UPDATE: According to "Government Executive.com" the ROTH TSP has again been delayed until at least April 2012.

http://www.govexec.com/dailyfed/0311/032811l1.htm