TSP

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John Grobe

Happy Rothday! The Roth IRA is turning 25 years old this year. That means that it is 15 years older than its younger sibling, the Roth TSP, which is just turning 10.

How did the Roth IRA get its name? Senator William Roth (R, DEL) was its indefatigable sponsor, working for 8 years to get this new type of IRA introduced. Congress so admired his determination that they named the new IRA after him.

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You have to go back to 1989 to find the beginnings of the Roth. At that time Roth and Senator Robert Packwood (R, ORE) introduced what they referred to as the “IRA Plus” which would be funded with after tax contributions. It wasn’t until 1997, however, that what we know today as the Roth IRA was created by means of the Taxpayer Relief Act of 1997. By then, Packwood had retired from politics, so he didn’t get his name on the new financial product.

Roth 401(k) plans were first allowed in 2006 (401(k)s had been around since 1978) and the TSP, never known as an early adopter, introduced the Roth TSP in 2012.

The whole concept of a Roth is to allow future retirees to invest after-tax money in order to get tax-free distributions when retired. In order for Roth distributions to be totally tax-free (also called “qualified”), the individual must have had a Roth account for at least 5 years and must be at least 59 ½ years old. Those who take distributions before the distributions are qualified will have to pay taxes on the portion of their distribution that is due to earnings.

What’s the future of the Roth? There are fears that cover every eventuality. Some pundits think that the Roth will grow to supplant the traditional IRA. These folks think that “Rothification” will replace tax deferred contributions to traditional plans altogether. The reason for this, they say, is so that the government can get its hands on your money right away and won’t have to wait until you begin withdrawals to get it, as is now the case with traditional IRAs. The original draft of the Tax Cuts and Jobs Act, drastically curtailed tax deferred investing, though those proposals never made it to the final bill.

On the other hand, some doomsayers suggest that the rules will change so that all or part of Roth withdrawals will be taxed at some point in the future. I find it hard to imagine the rules changing so that earnings are no longer tax free. Even Congress would never consider double-taxing Roth contributions.

What about those of us who have money in Roth vehicles now? I believe that, if there are future changes, what we have now will be grandfathered in under current rules.

Regardless of what happens, we should all wish the Roth IRA a happy birthday this year.

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