Proposed rules set for publication on Wednesday lay the groundwork for a major change in the investment choices available to federal employees through the Thrift Savings Plan with the addition of a Roth alternative.
The TSP is a 401(k)-style retirement savings program open to federal and postal employees as well as to members of the uniformed services and retirees. Traditionally, the plan has allowed only pre-tax investments that are taxable along with the earnings on withdrawal. Investments through a Roth design would be made with after-tax money that, along with its earnings, will be tax-free on withdrawal if certain conditions are met: The participant must be at least 59 ½ years old, disabled or deceased, and the first Roth contribution must have been in the account at least five years.
The TSP received authority through a 2009 law to allow Roth-style investing — which has become increasingly common in similar retirement savings programs — and has been working since to prepare a launch. The rules proposal is one of the final steps; the TSP expects to make the Roth choice available during the second calendar quarter, 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 age 50 or older will be able to make catch-up contributions to one or both types of balance, subject to a separate total limit that reaches $5,500 this year.
Workers covered by the Federal Employees Retirement System receive 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 choices 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:
● 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 the Roth design.
● If participants borrow against their TSP accounts, the amount will be drawn proportionately from the two types of balances for those who have 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.
● Participants who choose to buy an annuity with their accounts after separation would have to purchase separate annuities with the two types of balances.