The long-awaited Roth feature of the Thrift Savings Plan launches Monday, although in practice most TSP investors will have to wait still longer.
Federal employees and uniformed services personnel now may choose to make some or all of their investments in the 401(k)-style plan with after-tax money that will be tax-free along with its earnings on withdrawal, so long as certain conditions are met. The change carries out a 2009 law authorizing that form of investing as an alternative to the TSP’s traditional design, in which investments are made on a pre-tax basis but are taxable along with their earnings on withdrawal.
However, as previously announced, the government’s largest payroll provider, the Defense Finance and Accounting Service, will not be ready to process Roth-type withholdings for federal employees until July. For military personnel, the option will be phased in over June to October.
In addition to civilian and military Defense Department personnel, DFAS provides payroll services to the Energy, Veterans Affairs and Health and Human Services departments, the Environmental Protection Agency, and several smaller entities including the White House—covering about three-fifths of federal workers outside the independent U.S. Postal Service.
“The first thing that an employee will have to do is find out if their agency’s payroll office is ready to process Roth TSP elections,” TSP spokeswoman Kim Weaver said in an e-mail. “Once an employee knows that, how they make their election depends on the agency. Some agencies use forms and some agencies have systems that allow employees to make elections online.”
She said the TSP has been told informally that some other payroll service providers—there are about 100 of them across the government—also won’t be ready, but the TSP does not have a list of them.
Until a payroll processor can distinguish between the two types of investments, accounts will be “business as usual,” TSP Executive Director Greg Long said at a meeting of the agency’s governing board last week. “We couldn’t be in a position where we had to wait for every agency to be ready,” he added.
While Monday is the first day that agencies can start processing Roth elections, the first actual Roth investments likely won’t occur for a week or two, depending on payroll cycles, Weaver said.
Investors may invest in one or the other type of balance or both, up to an annual dollar limit that this year is $17,000. In addition, those aged 50 or above may invest up to an additional combined total, $5,500 this year.
For those with both types of balance, allocations of investments among the available funds will apply to both, and loans and withdrawals will be taken from each on a prorated basis. Government contributions for those under the Federal Employees Retirement System will be made to traditional account balances regardless of whether the employee personally invests in a Roth balance.
Several people who commented on the draft rules suggested that the program allow participants to convert account balances between traditional and Roth status. The TSP said it does not have the authority to allow such conversions and that it would wait until the Roth feature is fully in place before considering that issue.
Similarly, the TSP said that it would revisit in the future its policy that withdrawals by investors who have both types of balances must be taken from both on a prorated basis.