Understanding the Roth TSP

April 17, 2012By: Ann Vanderslice

Securities offered through Allied Beacon Partners, Inc. Member FINRA/SIPC. Home office 1201 S. Highland Avenue #2, Clearwater, FL 33756 727-441-1616

What We Will Cover Today:How Does Roth TSP Work?Contribution Rules and LimitsComparison of Roth TSP to Traditional TSPRoth TSP Benefits and PitfallsTax Implications While WorkingTax Implications While in RetirementHistory of Income Taxes

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How Does Roth TSP Work? Combined contribution limit for 2012 is $17,000,

plus $5,500 catch-up if age 50 or better Agency contributions will go into Traditional TSP Interfund transfers and contribution elections will apply to both TSP

and Roth TSP You cannot convert TSP funds into Roth TSP You can transfer a Roth 401(k), Roth 403(b) and Roth 457(b) into

Roth TSP but NOT a Roth IRA

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Contribution Rules and Limits Anyone that is eligible to contribute to TSP is also eligible to

contribute to Roth TSP No income limitations for contributing to Roth TSP Combined total of Roth TSP and Traditional TSP cannot exceed

$17,000 and catch-up of $5,500, if age 50 or above You can contribute the maximum to Roth TSP as well as the

maximum to an individual Roth IRA; however, there are income restrictions for a Roth IRA

Roth IRA Eligibility Contribution limit $5,000, plus $1,000 if over age 50 Income limits to contribute to Roth IRA -

$110,000 - $125,000 single & HOH $173,000 - $183,000 joint $ 0 - $10,000 married filing separately

Roth Conversion - NO Income Limit

Comparison of Roth IRA and Roth TSP

Similarities:

Contributions are made with after-tax dollars and can be withdrawn income tax-free if you are age 59 1/2 and follow the 5-year rule, (Roth has to be established for at least 5 years in order to allow earnings to come out tax-free)

Paying the tax in today’s known tax environment may prove to be a valuable tool during retirement

Comparison to Roth IRA and Roth TSP

Differences:

• You are not required to take a minimum distribution from a Roth IRA, but you are required to begin taking RMD’s from the Roth TSP by April 1st following the year you turn age 70 1/2 if you are no longer employed by the federal government

• There are income restrictions to contribute to a Roth IRA; however, there are NO income restrictions to contribute to Roth TSP

• You can contribute significantly more to the Roth TSP than a Roth IRA. Depending on your income and age, the maximum contribution level for the Roth TSP is $22,500 vs. $6,000 for a Roth IRA

Considerations Before Deciding to Use the Roth TSP

1. Your current tax bracket - how much room do you have in your current tax bracket for additional taxable income?

2. Once you know how much of your eligible contribution you could make at the same tax rate, you’ll want to determine the net effect on your paycheck.

3.Today your net paycheck has taxes deferred when you contribute to TSP (which means less money is taken out of your paycheck for taxes). Taxes are paid up front on contributions to the Roth TSP (which means more money will come out of your paycheck for taxes)

4. Contributing to the Roth TSP can take the uncertainty out of future tax rates and their impact on your retirement income

Considerations Before Making a Decision

• If you choose to contribute to the Roth TSP be aware: -Increased income may affect the tax owed on income tax deductions, exemptions, and the ability to use tax credits (as well as Social Security income, Medicare Part B premiums, if applicable)

-Increased income may also affect your children’s ability to receive scholarships and financial aid

• A Roth TSP can be rolled over to a Roth IRA and provide an income tax free legacy for your children and grandchildren

Reasons Not to Have a Roth IRA

Income tax is due now

No tax deductions for Roth IRA contributions

The tax deduction is needed now

You believe you will be in a lower tax bracket when withdrawals are made

The Future of Tax Rates

Where do you think tax rates are headed in the future?

1) Increase

2) Decrease

3) Stay the same

Prospects of Higher Taxes

Top Federal Tax Rates 1913 - 2009

Source: Tax Foundation – www.taxfoundation.com and H.S. Dent Foundation

Married filing jointly

Source: Tax Foundation, 2005; CCH, 2009

2012 Marginal Income Tax Rates

$0 - $17,000 10%

$17,000 - $69,000 15%

$69,000 - $139,350 25%

$ 139,350 - $212,300 28%

$ 212,300 - $379,150 33%

$ 379,150 - and over 35%

Married filing jointly

Source: Tax Foundation, 2005; CCH, 2009

2013 Marginal Income Tax Rates (After extension of Bush Tax Cuts expire)

$0 - $43,850 15%

$43,850 - $105,950 28%

$105,950 - $161,450 31%

$161,450 - $288,350 36%

$ 288,350+ 39.6%

Two Kinds of Taxes:

Current Taxes

Deferred Taxes

“The deficits and escalating debt levels of the size we have now, and where they are headed, represent deferred taxes with interest that we, our children and our grandchildren will be expected to pay.”

~David Walker Former Comptroller of U.S. Government President and CEO of the Peter G. Peterson Foundation

If we don’t get our act together, within 20 to 25 years, federal taxes alone will be more than double! That’s without an increase in interest rates, which is not realistic.

~David Walker

Two Key Factors are:

Historical Data

Private and Public Debt

www.usdebtclock.org

Total United States Debt:

Government Debt: $18.2 Trillion

Private Debt: $37.4 Trillion

Consumer: $12.3 Trillion

Corporate: $11.6 Trillion

Financial: $13.5 Trillion

Data Source: Federal Reserve Flow of Funds Report, 2012

Data Source: Federal Reserve Flow of Funds Report, 2012

The Four Buckets

TAXABLE TAX-DEF’D TAX-FREE

INCOME & ESTATE TAX-FREE

•Bank•Brokerage•Trust

•Ret. Plans including TSP•Non-Qual. Ann’s•Savings Bonds

•Muni-Bonds•Roth IRA•Roth TSP•Life Ins.

•ILITs•CRTs•Special Trusts

Tax Strategies moves assets to the right

Is Roth for You?

Taxes Now?

Taxes Later?

How Much to Roth TSP?

How much to Traditional TSP?

Take Advantage of our TSP Roth Consultation

Optional Paycheck Calculator to determine differences in your net paycheck if you choose to do all or partial contributions to Roth TSP

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A penny here, and a dollar there, placed at interest, goes on accumulating, and in this way the desired result is attained. It requires some training, perhaps, to accomplish this economy, but when once used to it, you will find there is more satisfaction in rational saving than in irrational spending.

~ The Art of Money Getting, by P. T. Barnum