A New Approach to Retirement Planning

Introduction

According to Isaacs (2011), Roth Thrift Savings Plan (TSP) 2012 which is based on the TSP Enhancement Act 2009 plays a pivotal role in helping federal workers achieve adequate retirement income. He points out that unlike the past where Thrift Savings Plan participant contributed to both standards TSP, with the proposed regulation the TSP, participants will choose one plan or the other. He further pointed out that under the new enactment; participants through their Roth Individual Retirement Account (IRA); are able to invest their money.

Park (2010) points out that just like a company would need a steady stream of cash coming in to influence a manageable debt so is the individual. In his argument, most of federal employees and retirees venture into retirement planning scheme such as Roth TSP to enable them have adequate cash flow at their retirement. He admits that most of the investors use annual financial reports of various retirement schemes as a starting point in forming expectations of their level of future earnings and risks involved. The write up analyses the Roth Thrift Savings Plan (TSP) scheme and its impact on the investment sectors as a new retirement benefit planning.

Roth TSP 2012 Plan

According to Voltani (2011), Roth TSP is essential in enhancing retirement beneficiary. He notes that most people have experienced major financial challenges after their retirement because of their failure to save enough for their life after retirement. He admits that retirement savings crisis has spread throughout United States with people venturing into retirement without adequate savings. He observes that, this has made most of the people increasingly rely on Social Security retirement benefits which primarily are seen as the last resort. Voltani (2011) points out that Roth IRA has become one of the retirement benefits schemes that are intended to benefit mostly the low income federal employees. He notes that the plan has the potential of correcting the financial stalemate facing the retirees.

Mankiw (2009) explains that the nation’s saving rates are key determinants of its long run economic prosperity. He points out that if the saving rates shoot higher more resources tend to be available for investment. In his context, the Roth TSP plan which encourages retirement savings through pre-tax of individual’s income is a key contributor in the United States economy.

According to the U.S Federal Retirement Thrift (2012), the implementation of the Roth 401(k) contribution plan is key success to retirement benefits. It points out through its website that the scheduled plan for the third quarter of the calendar year 2012 will for the first time see federal employees and military personnel apply their contribution to the Roth TSP accounts. The Federal Retirement Thrift notes that participants of the Roth will potentially have two types of balances in their TSP accounts. These include both the traditional (non-Roth) TSP balance and the Roth TSP account.

The Federal Retirement Thrift through their website explains that any agency contribution that an individual receive will be notified as part of the traditional (non-Roth) balance. However, it illustrated that the money at the individual accounts at the start of the Roth contribution remains as part of the traditional TSP balance. In its, context, this is advantageous to the participants as they are able to access both of their accounts at a one time spread sheet.  Park (2009) points out that most of retirement investment choices are commonly based on retirement accounts that maximize the economy benefits.

Advantages of Roth TSP

Voltani (2011) notes that there are a number of advantages associate with the Roth TSP that have outweighed most of the  retirements schemes such as the ordinary Roth IRAs and 401ks. According to him, it is these advantages that have influenced individual self motivation towards the need for retirement benefits schemes and accounts. According to Roth IRA website (2011), the Roth Individual Retirement Account benefits the participants since the individuals are able to grow their wealth and withdraw the same tax free.

According Losey (2010), Roth TSP option allows participants to invest the after-tax earnings into funds that will continue to grow without tax liability on the future earnings. He attributes that this process differs from the previous standard TSP plan where before tax earnings are invested and taxed on withdrawal. Isaac (2011), points out that the Thrift Savings Plan (TSP) is a defined contribution retirement plan which is similar to the 401(k) plans that are provided by many employers in the private sector. He adds that the Roth TSP is a key component of the Federal Employees’ Retirement System (FERS) especially for workers in the middle and upper federal pay unlikely to achieve adequate retirement income.

According to Losely (2010), the Roth TSP option is beneficial to the low income federal employees. He argues that by the IRAs participant paying taxes while in a lower earning bracket they are potentially able to avoid higher taxes which may a rise at their age of retirement. He explains that Roth IRA is beneficial as compared to the traditional IRA. He notes that according to the traditional IRA if for example, a 15% tax is charged on individual earning and it shoots to say 40%, the traditional IRA will charge even the earnings put away while in 15% at 40% tax. He points out that with the Roth IRA, tax on earnings are based on the current bracket at each investment which potentially helps in saving enough money by their retirement age.

According to the Federal Retirement Thrift website (2012), one is not entitle to pay tax at the age of 59.5 years or if disable based on the Roth TSP option. It further notes that since at the age of 59.5 or being disable you one is only allowed to withdraw at least 5 years after the year he/she begins his/her first contribution, this allows more investment into the scheme. According to the website, the free tax earnings influence more people to join Roth. It explains that once an individual’s money has been in the Roth for at least 5 years, then the individual is entitled to 100% tax free on any dividends, interest or capital gains.

According to the Federal Retirement Thrift (2012), Roth TSP is beneficial more so to uniformed members who make contribution from the tax-exempt payment they earn in combat zone. It stipulates that the beneficiary of being a Roth contributor may make the participant not to pay taxes on either individual Roth contribution or individual’s earnings as long as age limit is satisfied.

Voltani (2011) on the other hand argues that the Roth TSP plans, through the Roth IRAs, offers large choice of investment options as compared to either 401ks or traditional IRAs. He explains that according to the latter, either the bank or employer offers a participant limited range of investment avenues as compared to the Roth IRA. He points out that with the accessibility of the incorporated stocks, the mutual funds, bonds, real estates, business partnerships and so on through the Roth IRAs an individual is subjected to his/her own prerogative.

Losely (2010) points out that a Roth IRA can be invested in arrange of gaining strategies that includes mutual funds and traditional stocks. He notes that when money is invested in a Roth IRA scheme, it is federally taxed based on the current tax bracket that is contrary to the traditional IRA. Additionally, whenever withdrawals are being made through the Roth scheme, all the funds invested in it are free from federal tax. Schmidlin (2008) points out that by adding more mutual funds to the investment options, one anticipates more responsibility of TSP Board in providing information about those funds.

According to Isaac (2011), Roth TSP plan on retirement operations are enthusiastic and beneficial. He notes that the Roth TSP provides an automatic enrolment for newly hired federal employees at an affordable default contribution rate of 3% of pay. This in his view will contribute to more Roth IRA participants and eventually influence better retirement benefits. According to Schmidlin (2012), the automatic enrolment of new federal employees to the TSP is a wonderful idea which will benefit many of young people. He adds that the participants’ employees can still benefit from lower-risk G fund even if they choose to opt out of the TSP.

The process of converting from the individual TSP to an individual Roth IRA is seen as economically healthful as expressed by Federal Retirement Thrift (2012). According to its website, federal employees and retirees find it beneficial to venture in such process to save them from taxes of investment earnings and growth long term. It further benefits the 59.5 years old from avoiding a 10% penalty on withdrawal based on individual’s earning. This in its views increases the Gross Domestic Product of an individual based on retirement benefits.

According to Losely (2010), the Roth TSP option will not only benefit the individual’s retirement but it will contribute to economic robust. He pointed out that with the Roth option launched in the first quarter of calendar year 2012; the TSP expects a budget increase of 10%. He observes that this amounts to the budget increase from $ 135 million for the fiscal year 2011 to $ 148.5 million in the fiscal year 2012 which are primarily contributed by the TSP changes. He added that since the plan will influence more participants, there will be an increase of TSP funds. He notes that TSP funds generally originate from the fees collected on the fund balances, which he illustrate that in 2009 amounted to $ 0.28 for every $ 1,000 in the participants’ account.

Voltani (2011) point out that Roth TSP offers better loan accessibility modes. He notes that as a participant of the Roth TSP you are able to take loans, in-service withdrawals and partial withdrawals as before. In his context, loan taken by an individual is balanced between the traditional account and the Roth accounts automatically. This will enable the citizens to manage and account for their individual retirement accounts. He further points notes the efficiency of individual withdrawing mode. He explains that this is because during withdrawals, one is able to separate his or her transfer option from either Roth or traditional balances to IRAs.

Losely (2010) points that the projected growth in the Roth TSP related transactions will increase the retirement sector production level. He notes that the Roth transactions will help in pushing record keeping cost from almost $ 4 million in 2012 to $ 109 million in subsequent accounting year. This according to him will see the upcoming of more investment opportunities that will enhance the living standard of most Americans.

The Roth TSP 2012 is viewed as a flexible retirement planning scheme that allows an individual to transfer money from Roth TSP account to Roth IRA accounts. According to Federal Retirement Thrift (2012), the transfer of money from Roth STP to Roth IRA is not subjected to any income restrictions that apply to the Roth IRA. This eases the transfer mode while increasing more returns on the individual’s investment.

Weaknesses of the Roth TSP

Just like any other retirement planning scheme, the Roth TSP has some disadvantages. According to the Roth IRA (2011), eligibility standards for the Roth TSP have been seen as its core differing factor. It admits through its website that Roth IRA as a fantastic retirement investment option has eligibility requirements that cannot qualify all people. It points out that these eligibility restriction ranges from individual’s income capability to individual’s contribution ability. It state that for an individual to utilize Roth IRA, his or her income must be under specific level as set out by the Internal Revenue Service (IRS).

According to Brandon (2012), the eligibility for a retirement benefits also depends on individual’s age. He points out that that an individual’s age plays an important role on an individual’s requirement to avoid retirement account penalties. This in his view has hindered most vulnerable and potential people to venture into retirement investments like the Roth TSP. He explains that at the contribution limits of say $ 22,500 for people of age 50 for the TSP 2012, most investors will restrain from investing in such retirement planning schemes.

The Federal Retirement Thrift through their website, points out that one of dissatisfying Roth TSP characteristics is based on contribution limitations. According to the website, the combined total of individual’s Roth and tax-deferred traditional contribution in 2012 cannot exceed the elective deferral limit of $ 17,000. Moreover, the individual’s catch-up contribution limit, according to Roth TSP, cannot exceed $ 5,500. This is based on risks limitation and is seen as an impediment to a broader society as it regulates some of the charitable work which an individual may wish to implement on a wider scale.

The Roth TSP option has been also seen to limit the origin of the retirement investors. This has denied potential non United States citizens who are key economic setters a chance to benefit from the scheme. According to Voltani (2011), all the Roth accounts are based on United States tax law and are typically only available in United States or to the United States citizens working abroad. This in his context has prevented more investor from such retirement obligation due to citizenship entitlement.

The other disadvantage of the Roth TSP based on the Federal Retirement website is for the agency contribution to be part of an individual traditional (non Roth) balance. This is viewed by individual participant as an uncorrelated move which subject the individual to tax obligation based on the traditional IRA for which tax is changed on withdrawal.  According to the website, individuals are entitle to transfer money from various Roth accounts including the Roth 401(k), Roth 403(b) and Roth 457(b) excluding Roth IRA into Roth balance of TSP account. This limitation affects those who wish to manage their Roth IRA investment through complete transfer of investment into Roth TSP system. 

Conclusion

The write up has demonstrated that despite its perceived weaknesses, the Roth TSP 2012 new retirement plan scheme has the potential of contributing immensely to the economic growth of both the individuals and the nation. It has demonstrated the key economic influence that the plan entails. A good example of such benefits is that the Roth TSP plan on taxation obligation is based on income contribution but not on withdrawals.  This makes this plan to economically suit the lower scale federal employees and retirees. However, to enable the citizens to benefit from this plan, its weaknesses such as that concerning the eligibility must be readdressed.