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The Benefits of Roth IRAs Now Come to the Thrift Savings Plan

The Thrift Savings Plan (TSP), the huge 401(k)-like retirement savings plan for millions of federal employees and members of the military, now offers an after-tax Roth option similar to a Roth 401k. But the majority of participants will have to wait a bit longer before they can take advantage of it.

The TSP officially launched its Roth option on May 7, 2012, allowing many federal employees to invest after-tax dollars in their retirement account for the first time. But one of the largest government payroll processors—the Defense Finance and Accounting Services—intends to phase in the Roth option over the next several months in order to test the complex changes involved in the various civilian, active duty military and reserve component payroll systems that it manages. In all, about three-fifths of federal employees are affected by the phase-in that is expected to be completed by October 2012.

Federal employees can benefit from a Roth as of May 7, 2012

Contributions to a Roth TSP account are made with after-tax dollars. Because contributions were already taxed, withdrawals—including earnings—will be tax-free once the participant is at least age 59.5 (or disabled) and the account has been open at least five years.

“The Roth TSP option offers an important new tool for federal civilian employees and uniformed service members in managing their retirement income by providing greater flexibility in the tax treatment of contributions now and in the future,” said Greg Long, Executive Director of the TSP.

With the addition of the Roth TSP option, employees can contribute to either the traditional TSP account or Roth account—or to both—as long as their total contributions do not exceed annual IRS limits. For 2014, employees can contribute up to $17,500 and those who are age 50 or older, can contribute an additional $5,500 in catch-up contributions for a total of $23,000.

The TSP’s Roth option got off to a slow start with only a handful of employees electing the new offering because of the government’s staggered payroll schedule. But the Federal Retirement Thrift Investment Board, which governs the TSP, expects those numbers to pick up after the Memorial Day holiday.

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