Thrift Savings Program and Roth IRA's

All funds grow tax deferred, but are 100% taxable upon withdrawal
Contributions are not counted as current year income
Withdrawals prior to age 59 1/2 may be subject to 20% tax plus 10% penalty
All loans taken from an active duty TSP account must be repaid
Withdrawals and transfers are not allowed while on active duty
A TSP may be transferred to a traditional IRA account after leaving military service without penalty or taxes
A TSP may be transferred to a ROTH IRA after leaving service without penalty, but will incur a tax liability. The amount of the transfer will be considered income for the year the transfer was made.

TIP: If you have never contacted TSP or accessed your TSP account at www.tsp.gov, all of your contributions will default to the G Fund. This fund typically has the lowest return. To ensure good diversification, you should obtain a password for web access and carefully review your TSP account options.

The TSP is considered a Qualified Retirement Account for income tax purposes. This places it in the same category as a 401k, a 403b, or a traditional IRA. This means that upon withdrawal after age 59 1/2 every dollar is fully taxable as ordinary income. Any withdrawals made will count as income in the year withdrawn and could result in boosting you into a higher tax bracket. This combined with the fact that you loose many larger deductions at retirement time, means that you may or may not be in a lower tax bracket after retirement.

The TSP can be an excellent part of your retirement plan, but does not represent the entire solution. Any good plan is based on DIVERSIFICATION. In addition to being diversified between fixed income (interest bearing) accounts and equity (mutual fund) accounts, you should be TAX diversified. You need the flexibility of having an additional source of funds to draw from that is TAX-FREE. When you are young, the best choice for TAX-FREE retirement income is a ROTH IRA.

ROTH IRA Basic Facts:

Maximum annual after tax contributions per person:
- $4000 in 2005
- $5000 in 2008
TAX-FREE withdrawals after age 59 ½
Withdraw contributions anytime
Gains subject to 10% penalty and taxation prior to age 59 ½
After 5 years penalty & tax free withdrawal can be made for 1st time home purchase ($10,000 max), disability, or death
After 5 years a penalty free withdrawal can be made for qualified higher education expenses (Tax-Free withdrawals for higher education at any age can be obtained by establishing a 529 College Savings Plan )

Comparison:

Qualified Plans (TSP) - You receive a tax deduction now on your contributions and understand that you will give back 20%, 30%, 40%, or more (your combined State and Federal tax bracket after retirement) on all funds withdrawn after age 59 1/2. You also face a penalty if you don't withdraw enough funds from your account starting at age 70 1/2 (mandatory distribution).

ROTH IRA - All contributions are made with after tax dollars. You forgo current tax deductions to avoid taxes on the ending values. All withdrawals after age 59 1/2 are 100% tax-free. There are NO mandatory distribution penalties at age 70 1/2.

If you have a Roth IRA funded by a Madison National One Check Plan purchased as a member of the military, are leaving active service, and wish to convert the plan over to an automatic check draft when your allotment stops, click for instructions: One Check Plan Conversion.