TSP looks into adding Roth 401(k) option
Stars and Stripes June 17, 2007
Pacific edition, Sunday, June 17, 2007
YOKOSUKA NAVAL BASE, Japan — Based on the results of a survey released Jan. 16, the Federal Retirement Thrift Investment Board is considering asking Congress to add a Roth 401(k) option to TSP.
The board hired finance and personnel consulting firm Watson Wyatt to conduct the survey to test waters for three proposed TSP changes:
n Adding a Roth 401(k) option.
n Automatically enrolling all TSP-eligible participants in the program with an option to get out.
n Adjusting the default fund for participants who enroll in TSP but fail to designate where to invest the money from the G Fund to an L Fund, which is more aggressive.
According to TSP spokesman Thomas Trabucco, the investment board is looking closely at whether a Roth feature might make sense for the TSP.
“Last August the Congress passed legislation (Pension Protection Act or PPA) allowing 401(k) plans to offer this feature on a permanent basis,” Trabucco said in an e-mail to Stars and Stripes.
“We will be developing further information to present to the board including what 401(k) plans have done with this new authority so far, input from our Advisory Council regarding likely demand for such a feature, as well as information from employing agencies regarding their ability to implement such a change,” Trabucco said.
According to Tim Kauffman, senior writer for Federal Times, the debate over whether to go to Congress to request changes to TSP has just begun.
“It seems to me that the main concern would be the cost,” Kauffman said in an e-mail. “TSP administrators notoriously are concerned about adding any new features, since it could drive up the administrative costs for operating the plan.”
Kauffman said that people in favor of a Roth option — 60 percent of those surveyed — think it will afford them greater tax benefits than the current setup.
“TSP administrators say that most employees will have lower income in retirement than they do now, so it makes more financial sense to get the tax advantage up front,” Kauffman said. “Yet for military members, the opposite is generally true. They’ll likely earn larger salaries once they leave the military, so it’d probably be better for them to get the tax advantage when they withdraw the funds.”
Kauffman added that he did not think TSP would make any moves toward a Roth option until the middle to end of 2008 at the earliest.
“TSP first would have to agree on what to do and then will have to send a legislative proposal to Congress, which would then have to approve it,” Kauffman wrote. “Even if all of that gets done before the end of this year, TSP would need time to put the new option into effect.”
The Federal Retirement Thrift Investment Board’s next meeting is scheduled Tuesday, so TSP participants can expect to hear more about this development soon.
Even though few servicemembers are aware of the changes being considered, Yokosuka’s Fleet and Family Service Center Personal Finance Manager Collin Schriver thinks all three changes should be unanimously approved.
In particular, he is excited about the potential of a Roth option.
“A pre-tax deduction with tax-free growth,” Schriver said in a phone interview. “What’s not to love?”
Taxes: Pay now or pay later?
Both the Thrift Savings Plan and a Roth 401(k) are tax-sheltered investment programs.
According to TSP literature, TSP shelters investors from taxes in two ways.
First, deductions are subtracted from pre-tax earnings. You are taxed on less income.
Second, income invested in TSP is not taxed until you begin to withdraw income. Pre-tax paycheck deductions both increase the amount of money accruing interest and lower yearly taxable income.
Roth 401(k) deductions are taxed before they begin earning interest. However, afterward all interest earned and compounded is tax-free and paid directly to the investor.
In both programs, the minimum age to begin drawing income is 59½. Military servicemembers generally retire before reaching that age. With a TSP, participants are not allowed to continue contributing after retiring from the military. From the time they retire until they begin withdrawing income, TSP earns interest only on itself.
With a Roth 401(k), investors may invest into perpetuity and even pass the investment from generation to generation.
— Chris Fowler