Welcome to TSP Strategies

Welcome to TSPstrategies.com! This Web site is dedicated to exploring the benefits of saving and investing in the Thrift Savings Plan.

The companion book, TSP Investing Strategies: Building Wealth While Working for Uncle Sam, lays out a simple set of strategies for long-term, buy-and-hold investors to consider while investing in the TSP. This Web site and accompanying blog will build on those concepts, while focusing on new investing options and developments related to the TSP.

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Jan


22

Will You Convert Your Regular TSP Holdings to the Roth TSP?

This is purely a hypothetical question right now, but TSP administrators announced earlier this month that they will study the steps necessary to implement an option that would allow participants to convert their current regular TSP holdings into a Roth TSP account, after paying the required taxes to do so.  The announcement read:

“The President approved the American Taxpayer Relief Act of 2012, on January 2, 2013. This law allows the TSP and other qualified plans to give participants the option to convert their traditional account balances to a Roth balance.  The amount converted would be taxable to the participant.  We are currently waiting for tax reporting guidance from the IRS and will be studying the actions required to offer a conversion option.  After that review, we will make decisions on whether to proceed.”

In addition to considering the affordability of the taxable amount participants might convert and weighing future personal income tax rates, participants will also have to take into account possible changes in the U.S. federal tax structure too.  If, twenty or thirty years from now, there are so many Roth millionaires who are no longer paying what Congress and the White House might consider a “fair share” of taxes, Congress might look to expand the tax code by instituting a national consumption or sales tax, or a “Value Added Tax.” By doing so, they would be able to regain a portion of that “tax-free” Roth TSP or Roth IRA income.  Similar to state sales taxes, income-tax-free Roth monies wouldn’t be able to escape a national consumption-based tax.

I’ll look to write more on this topic in a future post.

This entry was posted in Roth TSP, Thrift Savings Plan Updates and tagged , . Bookmark the permalink.

2 Responses to Will You Convert Your Regular TSP Holdings to the Roth TSP?

  1. W. Lee Radcliffe says:

    Thank you for relaying your recent experiences on this issue. I do not know why they have so far elected not to allow conversions to a Roth TSP. Until reading of you correspondence with TSP administrators, I had been cautiously optimistic that this option would be implemented in the next couple of years based on early statements from the FRTIB, allowing for the bureaucratic process to take its course. From what you have found, though, that appears not to be the case right now. I wonder how much the “optics” of such a conversion policy played into the decision to not allow it for now — that of Feds and uniformed service members building portfolios in the hundreds of thousands or even millions of dollars in a tax-free account. Already we’ve seen how current policies are pointing in the direction of taxing accounts in the future, the opposite of Roth-type accounts. In my opinion, these policy proposals will unfortunately continue to have some traction as fiscal challenges continue in the coming years.

  2. Federal Employee says:

    As mentioned above, the President approved the American Taxpayer Relief Act of 2012 on January 2, 2013. This legislation allows the the Federal Thrift Savings Plan and other qualified plans to give participants the option to convert their traditional account balances to a Roth balance.

    I am a Federal employee and am very interested in converting my traditional TSP balance to a Roth balance. Shortly after the passage of the ATRA of 2012, I have been periodically corresponding with the TSP to inquire on the status of this possible TSP option. On March 19, 2013, the TSP indicated that it was currently waiting for tax reporting guidance from the IRS and will be studying the actions required to offer a conversion option. After that review, the TSP indicated that it would make decisions on whether to proceed.

    Last week, I again inquired on the status of a possible in-plan Roth conversion and was sent the following response:

    The Federal Retirement Thrift Investment Board (Agency) currently has elected not to move forward with offering in-plan Roth rollovers.

    I am very disappointed and puzzled by the response I received from the TSP. When I spoke to a TSP representative by telephone earlier this year, I was told that the TSP was planning to offer an in-plan Roth conversion option and that it was only a matter of time before the option was offered.

    Do you possibly know why the TSP has decided not to move forward with an in-plan Roth conversion option? Given the overwhelmingly positive reaction the TSP received from offering a Roth option, I imagine I am not the only Federal employee interested in making an in-plan Roth TSP conversion. With the Federal Government in need of new ways to raise revenues, why has the TSP eleced not to move forward with offering in-plan Roth conversions? Any information or guidance you are able to provide would be greatly appreciated.

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