Roth TSP is Coming in 2012, Hopefully!

When Can I Contribute?

The Roth TSP (Thrift Savings Plan) is “love in a box” for the financial nerd, and I will hopefully receive all of its goodness next year, early 2012. According to the TSP newsletter, and this TSP news bulletin, the Roth TSP will begin to accept contributions no later than the second quarter of 2012. The current TSP is similar to a corporation’s traditional 401(k) plan, in that money that is contributed is only tax-deferred. Meaning, if I contribute $1000 to my traditional TSP in, say, 2011, that amount will be deducted from my 2011′s tax liability. But, when it’s time to withdraw the $1000 years later, I will taxed on both the $1000 and any interest gained from it.

The Down-side of the Traditional TSP?

The most argued disadvantage for a traditional 401(k), and by extension the traditional TSP, is that no one knows what the tax code is going to look like thirty years from now. What if the marginal tax rate years from now is 50% for even the lowest income earners? This means that one’s earlier contributions would be screwed out of 50%. This may be an exaggeration as to how high our taxes will go, maybe, but such a scenario is within the bounds of the current guidelines for the traditional 401(k) and TSP.

The Up-side of the Roth TSP?

But now, here comes Love, the Roth TSP. With a Roth TSP, no taxes from the accumulation of previous year’s contributions or earnings will occur when money is eventually withdrawn. Why? Because the money that will go into the Roth TSP will have already been taxed. So, in this case, if the tax rate thirty or forty years from now is 50%, the earnings and contributions of the Roth TSP wouldn’t be affected.

As a bonus, the Roth TSP’s contribution limits will be the same as the elective deferral limit of the traditional IRA, which is currently $16,500 in 2011. This means, if someone maxes out their Roth TSP for just thirty years, assuming that the contribution limit stays the same and the account earns no interest at all, he or she can withdraw $495,000 (not including fees) from their account, tax-free.

Using one of Bankrate.com’s calculators, if that same account earned just a measly average annual interest of 8%, it would be valued at over $1.9 million, in thirty years. Imagine withdrawing $1.9 million, tax-free at the age of 59 1/2. Though I can’t imagine myself that old, nor know what I would do with that much money at that age, it still would be a great financial position to be it.