Congress Begins Steps To Add Roth Option for TSP Retirement Plan

by Hank

The House Oversight and Government Reform Committee approved legislation on March 18th that would create a Roth option for the TSP.  With a Roth option to the Federal Thrift Savings Plan (TSP), which is similar to a 401-k plan for government employees, participants would invest after tax dollars similar to a Roth IRA. When you retire and withdraw those funds, the capital gains and interest earn would then not be taxed. That differs from the current tax-deferred TSP plan, where contributions are taxed at the time of withdrawal.

us-capitol-buildingA Roth option to the TSP would likely greatly benefit Servicemembers and other federal employees because their tax rates are likely to be currently lower than future tax rates.  You can see a great MS Excel spreadsheet that visibly shows the amount of money you can save by investing in a Roth IRA or Roth TSP vs. a traditional IRA or 401-k plan were taxes are deferred until withdrawal.

Automatic Enrollment.  The bill making its way through Congress also would automatically enroll new federal civilian employees in the Thrift Savings Plan.  As the bill is currently written, it would not affect members of the military.  The bill would automatically enroll new civilian employees in the government securities-backed G Fund. The legislation recommends that the Thrift Board to set the default percentage anywhere between 2 percent and 5 percent. 

While this may a little “Big Brother”-ish to people, it is actually a great program that many public and private corporations in America are already using.  There have been many academic studies that shows that automatic enrollment of employees into 401-k plans dramatically increases the amount of retirement investing workers participate in.  Many workers in America are actually throwing away free money by not capturing their employer’s matching contributions for their 401-k retirement plans.  This is free money that is just being wasted.  Where else would you earn 50 to 100% return on your money in our current economy?

Originally would have automatically enrolled new service members in TSP. But an amendment attached to the bill leaves the decision to the Pentagon to decide if troops should be automatically enrolled (Hint: They should!  Military participation in TSP is sad!).

Matching Contributions.  Another amendment would also require the Pentagon to study how much matching service members’ TSP contributions would cost and whether it would help recruitment and retention.  Matching TSP contributions have long been an item of contention among Servicemembers since the DOD civilians that many work side by side with receive a match from the government.

So, I will try and keep you informed about the bill “Title IV of HR 1256, the Family Smoking Prevention and Tobacco Control Act” as it travels through the maze that is our Congress.

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