Posted on Saturday, 16th January 2010 by

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What’s all the hoopla about the Roth retirement accounts?  Traditional and Roth retirement accounts have been around for years, but recent changes in IRS tax laws, and the TSP-Roth option available in 2011 have created renewed interest in Roth investment opportunities.  With these new opportunities, it is important to evaluate which option is best for you. This is just one of many financial planning issues federal employees and retirees need to consider.

The main advantages of a Roth retirement account are:

  • Tax planning
  • Retirement income planning
  • Inheritance planning

Tax planning: The tax implications are the most easily recognized difference between a Roth and a traditional retirement account.

Traditional IRA: This is a tax deferred account, which means the money deposited into a traditional retirement account is subtracted from your taxable income and potentially decreases your taxes payable in the year the deposit is made.  In addition, the earnings on the funds also grow tax-deferred. Thus, you pay no income taxes on the deposit or the earnings until the funds are withdrawn from the account.

Roth IRA: Money is deposited in a Roth account after income taxes are paid. It will not lower your taxable income in the year of the deposit. The Roth features tax-free withdrawals on the deposit and earnings for qualified distributions.  A qualified distribution is generally a distribution made after the Roth is established and funded for at least 5 years and is either:

  1. Made on or after you turn 59½ ,
  2. Made to a beneficiary after your death, or
  3. Made because you are disabled.

Sounding a little like a pay me now or pay me later argument, with little difference in the Roth and traditional options?  The key is predicting whether your tax rate will be lower now or in the future.  Often people make less money in retirement.  It would seem logical if you make less money, then your tax rate is lower too.  However, income earned is only a part of the taxable equation.  With fewer personal exemptions and deductions, taxable income can increase.  Your effective tax rate is often lowest when you have a house full of kids, deductible education expenses and a large mortgage.

In addition, many experts forecast tax rates will increase because of the exploding federal deficit and the possible expiration of the tax cuts enacted in 2001.  If you expect your effective tax rate to be higher in the future because of higher income or higher tax rates, then a Roth contribution, or a Roth conversion, may be something to consider.

Retirement Income Planning: So much attention is paid to the tax differences between the Roth and traditional retirement accounts that the other advantages are rarely mentioned.  A significant advantage of a Roth retirement account is in retirement income planning.  Traditional retirement accounts require you to begin Required Minimum Distributions (RMD) when you reach age 70 ½, whether you need the money or not.  There are no RMDs with a Roth account.  You decide when to take the money out and how much to withdraw, provided you are at least 59 ½ and the money has been in the Roth for at least five years.

RMDs are based on the average life expectancy on actuarial charts.  If you are not necessarily “average” – because your grandma lived to be 102, or you plan to continue working well beyond the normal retirement dates – the Roth may give you more options for planning your income disbursements.   Perhaps you anticipate needing the funds as you age for medical expenses, or you would like to provide an inheritance for your children.  A Roth account allows more flexibility for financial planning options.

Inheritance Planning: Would you rather pay the taxes on your retirement account assets, or have your beneficiaries pay the taxes on the assets? Since the taxes are not due until the money is withdrawn from a traditional retirement account, the beneficiaries who inherit the funds pay the tax. To learn more about inheritance issues and to explore estate planning techniques visit

With a Roth, income tax is pre-paid on the contribution and the earnings are not taxable.  Therefore, a Roth IRA is received free of income tax by the person who inherits the account, but a Roth account may be subject to estate taxes. If you have a large estate that is taxable, the size of your estate is reduced by the amount of income tax previously paid. The result is a smaller estate to be taxed, and the end value of the inheritance may be greater. RMDs are mandatory for the person who inherits either a Roth or a traditional retirement account.

2010 Roth Conversion Opportunity: Converting a traditional account to a Roth account has been limited to those individuals with a modified adjusted gross income of $100,000 or less.  In 2010, however, the income exclusion has been removed and people of all incomes can convert their traditional IRA to a Roth IRA.  The tax, retirement income and inheritance planning advantages also apply to Roth conversions.  Keep in mind, when you convert money from a traditional to a Roth account, taxes are due on all funds transferred.  For funds converted in 2010, you can elect to include the entire amount converted as income in 2010, or have the income amount split between the 2011 and 2012 tax year.

Both the Roth and traditional retirement accounts are fantastic methods to save for retirement.  Consider funding both a Roth and a traditional retirement account for maximum benefits and retirement planning options.  If you are considering contributing or converting to a Roth account, plan to do so in years when your effective tax rate is the lowest for the greatest tax benefit.

If you have questions or concerns about your retirement plan, or want to discuss your personal situation with a financial advisor, please contact me toll-free at 1-877-346-3434.

Visit for updates, clarifications, and questions and answers concerning Roth IRAs.

Need more information to evaluate your options, try the calculators available at:

TSP – Roth option:

For tax information about converting to a Roth IRA:

While the publisher and author have used their best efforts in providing retirement and benefits information, they make no representations or warranties with respect to the accuracy or completeness of the content of this article and they specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. The advice and strategies contained herein may not be suitable for your situation. You should consult with a financial professional where appropriate.

Visit often to learn more about retirement options, benefits, and estate planning issues and I suggest signing up to receive my FREE monthly benefits newsletter.

Linda Duncan

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5 Responses to “TSP to ROTH – Is a ROTH in YOUR Future?”

  1. Robert Eddins Says:


    I am 5-8 yrs from retiring. I am almost 58 now.
    I work for a VA Medical Center. I have worked for 4 federal agencies in the 21 yrs. I have. Many people who retire from my Med. Center come back angry because the retirement is messed up by our HR. My high 3 came from US Customs not the VA. Is there someone I can hire to audit my VA’s retirement account so I know I am not short changed.The problem here has been pretty bad. Two people actually had to come back to worl for 6 months to fiv their errors. Mostly they say less money than the retire was supposed to get. What do you suggest?

    Robert Eddins

  2. Linda Duncan Says:

    Robert, Your HR office is only providing estimates of your retirement. The actual adjuducation of the retirement is completed by OPM. For the individuals you spoke of, it is likely that they were given credit for service that was not creditable in their situation. Perhaps they previously requested a refund or there was temporary service or other service that was not creditable after the final adjudication. I would suggest you obtain a retirement estimate, review your official personnel folder (and ask for a copy of the SF-50s if you have not kept them), and make sure all the SF-50s indicate that you were covered under a retirement system (CSRS, FERS, Offset). Question anything that does not show you covered under a retirement system (Ex: If it says FICA only). Become familiar with the creditable service and the method of computing the retirement and complete your own retirement computation as well.


  3. Linda Duncan Says:

    Ken, The Roth feature under TSP is suppose to begin in 2011. There are all sorts of changes to the system that must occur with TSP to make this happen. If you are interested in a Roth, you can open a Roth IRA as a separate investment. In fact there are certain advantages to having a Roth IRA over a Roth 401k (like TSP should be). One of the primary advantages of a Roth IRA is that there is not a required minimum withdrawal at age 70 1/2. For more infomration on the TSP Roth see:

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