Federal retirees should consider the Roth IRA
By Dorothy Ramienski
Internet Editor
Federal News Radio
Have you thought about converting your traditional IRA to a Roth IRA?
Should you?
Arthur Stein is a certified financial planner with SPC Financial in Rockville, Md., and explains why one might consider making the transfer in the first place.
"The difference between [the two] is that, with a Roth IRA, the money that you withdraw is not going to be taxable income. It will be a tax free withdrawl, and there are no required minimum distributions. So, when you hit 70 1/2 and you're retired, you don't have to start taking money out of a Roth IRA. You would have to start taking money out of the TSP or a regular IRA."
There are disadvantages when it comes to making the switch, however. When you make the switch, you have to pay all taxes that are due when you convert.
"It is a fully taxable transfer. Basically, this is going to be an advantage for people who expect to be able to leave their money in the Roth IRA for a long period of time, and who expect their money to be worth a lot more in the future than it is when they make the transfer."
One basically has to consider when he or she wants to pay taxes -- now or later. Another thing to keep in mind is that tax rates have a tendency to change. For example, the top marginal income tax rate is going up about 5 percent next year, Stein added.
"So, people who convert this year and pay the taxes on this year's return will have the advantage that, when they take the money out, tax rates will be higher."
For younger employees, the Roth IRA could be the best option and might serve as a good compliment to TSP investment.
"Everybody wants to contribute at least 5 percent of their salary to the TSP to get the full match, but younger employees are in a very low tax bracket [and] expect to be in a higher bracket in the future. . . . It might make sense to put the remainder in a Roth IRA. You won't get a deduction when you put the money in, but years later when you take the money out, as long as it's been there for at least 5 years and you're over 59 1/2, the withdrawls are going to be tax free."
The time might be especially right because the laws have changed. Stein explained that there are no longer income limits when it comes to conversions, so making the switch could be easier, even for those who are no longer working.
"Retired federal employees can convert their TSP balances into a Roth IRA, and, actually, next year the TSP is scheduled to have a Roth TSP option."
Stein stressed that making the move, or staying put, completely depends upon the situation of the individual, and not every choice is right for every investor.