It’s finally March. The snow is melting as temperatures warm. But there’s more to celebrate than just spring and clean, invigorating air. The Roth version of the Thrift Savings Plan (TSP) arrives in April.
We’re excited about what this development means for everyone serving in the military or working for the federal government that we want to get the word out. You may not currently work for the federal government, as either a civilian or part of the military, but we’re banking on the fact that you probably know a lot of folks who do. So whether they’re family members or friends, let them know that they now have the opportunity to incorporate the Roth version of the TSP into their retirement-savings strategy.
Why does the word “Roth” make us smile? Well, it’s as simple as two words that when uttered together are very cool: tax-free. While contributions to this version of the TSP won’t reduce your income taxes today as traditional TSP contributions would, current tax law allows these contributions (and all of their earnings) to be withdrawn tax-free after you’re 59½ and have had the account for five years. If you fall into the camp that believes tax rates may be inching higher in the future, or you just want to hedge against that possibility, the flexibility offered by the Roth TSP is a breath of fresh air.
Wouldn’t you like to own all of your retirement savings? That’s not a trick question. With a traditional TSP or 401(k) account, every withdrawal is subject to ordinary income tax. With today’s tax rates, that could mean your retirement savings will receive a 15-, 25- or even 35-percent “haircut.” That’s not the case with withdrawals from a Roth plan. With a Roth or even a combination of traditional and Roth accounts, you’ll have more control over how much and when you pay taxes.
Remember: it’s not how much you save for retirement that matters, it’s how much you net after taxes. When our employer, USAA, rolled out the Roth version of its 401(k) a couple of years ago, we both signed up and started directing part of our retirement contributions to both plans, allowing us to save on taxes today and tomorrow. We think you and yours should consider doing the same. Tax-free, baby! Help us spread the word.
June Lantz Walbert and J.J. Montanaro are certified financial planners for USAA, The American Legion’s preferred financial provider of financial services. Submit questions for them online. www.legion.org/focusonfinances
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers. USAA Financial Planning Services® refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner TM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.