Roth TSA now available

Last updated: 8/20/2007 1:48:44 PM

On January 1, 2006, a new savings feature became available to TSA or 403(b) plan sponsors as an option for plan participants—the Roth TSA.

What is the Roth TSA? What’s the difference between the Roth TSA and my current TSA?

The Roth TSA allows employees to contribute after-tax dollars to their retirement savings plan for tax-free growth. Until now, all TSA contributions were made on a before-tax basis, reducing your taxable income. You don’t pay taxes until you withdraw the money. Roth contributions are after-tax, which means you pay taxes now on your contributions, but all qualified* withdrawals, including earnings, are tax-free.

*For qualified withdrawals, the participant must be age 59½ or older and have had the account for at least five years.

Both before-tax and after-tax contributions have their advantages. However, the real advantage may be that it's not a "one or the other" proposition. Participants may make contributions on a before-tax basis, an after-tax (Roth) basis, or some combination of the two up to the 403(b) limit.

Roth TSA: Great for the young

Generally, most participants should consider adding the Roth TSA to their savings strategy. However, there will be some who will benefit more from before-tax contributions. The Roth option is particularly attractive to young employees who may be in a lower tax bracket and can count on years of tax-free earnings. Also, anyone who expects to be in a higher tax bracket in retirement should consider adding Roth contributions to their savings strategy.

Roth contributions may offer tax relief in retirement

For decades the assumption has been that most, if not all, participants would be in a lower tax bracket in retirement—and thus would benefit from before-tax savings. However, changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions made available under the tax code increase the chances that you will be in the same or higher tax bracket when you retire.

In addition, consider the fact that at retirement, public school employees typically have at least three sources of income: Wisconsin Retirement System (WRS), Social Security, and individual retirement savings. All are taxable in retirement.

Any tax savings realized today with pre-tax contributions could be more than offset by a higher tax bill in retirement. The Roth TSA is an opportunity to have more control over tax liability in retirement. Holding both pre-tax and Roth savings will help manage future tax uncertainties. This is tax diversification.

How can I start making Roth TSA contributions?

WEA TSA Trust offers the Roth. However, districts are not required to offer the Roth TSA feature in their plan. Check with your employer or check our list. If the Roth TSA is an option, simply fill out a Salary Reduction Agreement to direct part or all of your contribution to the Roth TSA.

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