Proposed rules set for publication Wednesday lay the groundwork for a major change in the investment options available to federal employees through the Thrift Savings Plan with the addition of a “Roth” option.
The TSP is a 401(k)-style savings program open to federal and postal employees as well as to military personnel and retirees that traditionally has allowed investments only with pre-tax money that is taxable along with its earnings on withdrawal. The Roth option will permit investments with after-tax money that along with its earnings will be tax-free on withdrawal, if certain conditions are met.
The TSP received authority through a 2009 law to allow Roth-style investing — which has become increasingly common in similar retirement savings programs in recent years — and has been working since to prepare a launch. The rules proposal is one of the final steps; the TSP expects to make the option available during the second calendar quarter of the year, meaning April at the earliest.
Under the rules, employees could invest through the traditional design, the Roth design, or both. However, the combined annual investment would have to stay within a tax code limit, which is $17,000 this year.
Similarly, investors who are age 50 or older during a year will be able to make “catch up” contributions to one or both types of balance, subject to a separate total limit that this year is $5,500.
Employees covered by the Federal Employees Retirement System get government contributions into their accounts of up to 5 percent of salary, depending on how much they invest personally. The individual’s total investment will be used to determine the match, but all agency-provided money will go into a traditional balance.
Employees under the Civil Service Retirement System, which mainly applies to employees hired before 1984, get no government contributions.
The fund options will not change. Participants can invest in funds tracking bond or stock indexes or in funds that mix investments depending on the expected withdrawal date.
Other key features will be:
* Newly hired employees, who invest 3 percent of salary by default unless they choose a different amount or opt out entirely, will have those investments made under the traditional design unless they choose to invest through a Roth design.
* If investors borrow against their TSP accounts, the amount will be drawn proportionately from the two types of balances, for those with both. Certain required distributions, such as court-ordered payments, also will be paid out proportionately.
* The TSP will accept transfers of Roth funds from a similar retirement program, such as the 401(k) of a previous employer, and will transfer out the two types of balances separately if an employee asks for that on separation.
* Investors who choose to purchase an annuity with their accounts after separation would have to purchase separate annuities with the two types of balances.
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