2009/03/23 00:00:00
By Col. Steve Strobridge, USAF-Ret.
A new bill that would add a Roth option to the Thrift Savings Plan (TSP) for currently serving military and federal civilian personnel is in line with MOAA’s recommendation to improve the TSP. But it comes with an amendment that would task the Pentagon to assess federal matching of servicemembers’ deposits, and that’s a Trojan horse that would threaten career servicemembers’ retirement value in the long term.
Let’s address the good news first.
The House Oversight and Government Reform Committee approved legislation in mid-March that would establish a new Roth TSP option for active duty and Selected Reserve servicemembers and federal civilian workers. That means they could make their TSP deposits after taxes, let them grow tax-free until age 59 ½ or later, and then withdraw the money tax-free in retirement.
Under current TSP rules, deposits aren’t taxed, but all withdrawals in retirement are. Getting a tax break on current income is a good deal — but not nearly as good a deal as the Roth option for many.
Why? Because many servicemembers might end up in an equal or higher tax bracket when they retire. For people in that situation, the Roth option allows them to make a small tax payment now and gain a huge tax benefit later.
The Roth option is particularly good for young people because they tend to be in relatively low tax brackets. Under today’s regular TSP plan, a young person doesn’t get that much gain from deducting TSP deposits and will pay taxes on a large (one hopes) pile of TSP withdrawals in retirement. The main benefit is avoiding taxes on any annual growth in the interim.
The Roth option often is a better deal for military people because a substantial chunk of their current income — housing and subsistence allowances as well as basic pay and bonuses earned while in a combat zone — already is exempt from taxation.
That means their gain from deducting TSP deposits from current taxable income might not be all that large.
Further, servicemembers (especially officers) have something many other Americans increasingly won’t: a fairly substantial taxable retired pay to supplement any retirement income from a post-military career. Throw in withdrawals from a taxable TSP and any 401(k)s or IRAs plus any spousal retirement, and they might find themselves in an equal or higher tax bracket after they retire.
Many of today’s retired military couples have incomes high enough that their Social Security benefits also are subject to federal income taxes. See the light? For such folks, the Roth option can offer far greater tax savings in retirement than they get from deducting TSP deposits while on active duty.
Now let’s talk about potential downsides of the new bill.
Originally, it would have required automatic TSP enrollment for all new military and federal civilian hires, with a default deposit of 3 percent of basic pay — while allowing individuals to opt out of enrollment or elect a smaller deposit.
MOAA wouldn’t object to that in principle. Our only concern is whether new recruits’ opt-out paperwork could be processed fast enough to prevent deductions from their first paycheck without consent. So Rep. Darrell Issa’s (R-Calif.) amendment has been included to let DoD delay or bar automatic enrollment for military people.
Far more worrisome is another Issa provision requiring a Pentagon report on the cost and recruiting/retention effect of establishing a government match for servicemembers’ TSP contributions.
Whoa, there … We’ve seen that idea many times before, and they’ve all entailed “reforming” the military retirement system to make it look more like a civilian plan.
Ultimately, this formula leads to reducing the amount of money the government puts into the current retirement plan, having military people fund a big chunk of their military retirement benefit with their own money, delaying the age at which military people can draw retired pay, and/or taking money from people who serve a career in order to fund retirement vesting for people who elect to leave service short of a career.
That was the outcome when Congress reformed the federal civilian retirement system in the 1980s, and it’s the concept behind the retirement reform proposals of the 10th Quadrennial Review of Military Compensation.
All such proposals ignore that the unique and arduous conditions of service inherent in a 20- to 30-year military career simply don’t fit the civilian-style retirement concept.
MOAA strongly objects to any such ideas, which we believe would lead to a long-term retention and readiness disaster.
And any who think Congress would be willing to add TSP matching for the military on top of the current military retirement system need to review the past 30 years of legislative history regarding this topic — during times of budget challenges that were far less daunting than those that lie ahead.
Let’s not play with matches for the military under the TSP, or it’s the career force and their families who’ll get burned in the end.
About the Author: Col. Steven P. Strobridge, USAF-Ret., joined MOAA’s Government Relations staff in 1994 and was appointed director of Government Relations and elected co-chair of The Military Coalition in March 2001.
Copyright Military Officers Association of America. All rights reserved.
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Colonel Pribble |
3/30/2009 1:50:20 PM |
i disagree with the MOAA stance on matching TSP. I would like to see the results of a study on providing matching TSP funds. Further, as most military retirees retire early in life and have a second career it would be beneficial if TSP was available to retirees as well. A matching program would shift more control (and responsibility) of a serviceman's retirement from the government to the individual. This would be a good thing. Let's play with those matches. Fire can be a good thing or a bad thing.
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Major Simons |
3/29/2009 9:35:18 PM |
Col Strobridge has made some excellent points. I must comment on one of the earlier blogs about the civilian sytem being so good. Most Federal Empoyees covered under FERS get a 1% factor towards their retirement. We in the military get a 2 1/2% factor. For example a military person after completing 20 years gets 50% of their high three. A GS employee would only get 20%. Their minimum retirement age is around age 57. I can not believe if congress starts a matching program that the current military system would remain in effect. I do not recommend we start asking congress for any matching monies.
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Commander Issi |
3/27/2009 2:11:28 PM |
This could understandably be a good benefit for the military. It gives those who can afford an opportunity to make an investment in their retirement years.
I'm also seeing a thread of what the military and many in the civilian world also hold toward our government ... distrust. A shame but a fact. Our elected body will act mostly in what is seen as an expedient act ... the whim of it's electorate regardless of what one might term "ethical". In these times, the military has been forced to the forefront of our publics concern. But given the past, when the military is no longer in that forefront any standing benefits or justice toward our troops will be "up-for-grabs".
Another issue just raised by the media has been the uncovering of the fact that mutual funds have become highly unregulated. Many board meeting where "decisions" have been made have NOT been giving their due diligence on the buying and selling of stocks ... giving only "lip-service" to their decisions. No one has been paying attention to the "costs" associated with the fund loads ... many of which are outrageously and capriciously charged. As we've recently seen, many of us have lost 1/2 or more of our "savings" in these funds. And which companies/governmental agencies will be "host" to the purchase of these funds?
Guess my whole point to this is that given enough weight to these Roth IRAs as "retirement" additions we may see a definite downside to their use ... not only as "loss-leader" in economic downturns, but as a target by our congress ... and sadly to say ... by our own DoD as they continue to target medical costs ... a reason to target the "core" of our main retirement system!
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Major Burnside |
3/27/2009 12:02:07 AM |
I very much agree with the author's main concern. Any implementation of a 'new retirement plan/option' will be accompanied soon after with a larger reduction or elimination of the past one, e.g. no more High Three. Which will lead to a DIY retirement plan.
You already can count on Social Security right(?) so what else do you deserve? /sarc off
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Major Morgan |
3/26/2009 5:28:48 PM |
Excellent article. As service members it is not only natural but justified to be suspicious of any legislation members of Congress propose regarding military retirement. One only has to look at the REDUX in 1986 and the recent findings of the Defense Advisory Committee on Military Compensation (DACMC) to prove this point. The ROTH option is a great idea that would benefit most service members, however, it concerns me that this may be pandora's box. It isn't wise to risk the status quo for the possibility of a deficient retirement system in the future. Yes, government must find ways to generate revenue in these tough times, but I disagree with COL Kelly's remarks that lean towards assuming our "benefits must be cut." Don't worry, service members won't be "sticking their heads in the sand" when the traditional military retirement is truly threatened.
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Major Burgess |
3/26/2009 9:26:43 AM |
I agree with MOAA that the Roth option is a good thing. I currently contribute to a ROTH IRA each month vice the TSP for the benfits cited in the article. If TSP were to gain a ROTH option, I'd take advantage of it immediately. As for the matching option, I appreciate the debate, but I agree with Colonel Kelly. I want to see a study as well. If the congress continues to try and reduce the defined benefit in an effort to reduce overall military retirement funding than we should fight that sort of legislation. However, if they add this program to existing defined benefit retirement with no cuts, then I think matching would be beneficial and deserved. The retnetion side of this issue is a legitimate concern, but the continuous devaluation of the dollar and the congress' track record of increasing taxation over time tells me that without additioan lmethods of retaining wealth our defined benefits alone may not be enough in the future to properly compensate military memebers for their unique service to the country. I also agree with Kathy Cope, we need to stop penalizing "stay-at-home spouses" and disabled dependents who otherwise could work. My wife stayed at home for 4 years with our children when they were young and we took all of her IRA contributions out of my paycheck during that period. The contributions to her ROTH IRA should have been tax free on the front end as well. She kept our children from burdening the public child care system and I believe our children are better prepared for a successful happy life than a child care agency could have done. Her job skill detiorioration during that time is also a factor. She became less competitive for higher paying jobs in her career field (Business Sales) while caring for our children. Surley, her contribution, though not producing traditional income, should be recognized in the tax code by allowing tax free contributions to a retirement account in her name.
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Captain Epstein |
3/26/2009 6:50:45 AM |
I have two small points to mention for the government to match TSP contributions. The first is our civilian government counterparts get matches up to 5% I believe and there retirement is pretty good if you ask me. Also what about the service member who only wants to do a 4-6 year enlistment? They don't get the military retirement, but shouldn't they be given a nice "pat on the back" for trying to save some money before they transition into a new job?
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Colonel Lewis |
3/25/2009 9:25:59 PM |
I am a CERTIFIED FINANCIAL PLANNER(tm) practitioner in my civilian profession. As a rough rule of thumb, if you have ten or more years until using your retirement funds and if you expect to remain in or increase your tax bracket during retirement, then a Roth 401(k) is generally a good idea. That's exactly what I've done for the last few years with my 401(k) within a large investment firm in the business of giving investment advise.
Yes, Congress could change the law to possibly make a Roth less attractive. It can change any law any time it wants. As the law stands, it's potentially tax-free withdrawals and no mandatory distribution requirements make Roths very attractive.
Should the government ever decide to match contributions, those would be tax-deferred and therefore taxable upon distributions and subject to mandatory distributions.
Automatic enrollment is a good idea that corporate America already employs. Most Americans fail to save enough for retirement, and younger Soldiers to fail save at all. Forcing them to contribute to a retirement plan is fundamentally sound practice. They will learn savings techniques through experience. Lots of time to compound will provide the biggest boost to accumulate retirement funds.
A possible "opt out" idea is to set TSP eligibility as graduation from basic training. That should provide ample time for a Soldier's "opt out" paperwork to make its way through the pay system.
The goal is to accumulate retirement funds through sound savings principles, not to make excuses for failing to save. The Roth TSP and automatic enrollment are great ideas. Matching would be icing on the cake.
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Colonel Foust |
3/25/2009 8:49:25 PM |
An excellent treatise
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Colonel Kelly |
3/25/2009 8:44:33 PM |
Good points were provided on the tax advantages of the hypothetical Roth TSP. However, opposing a study resulting in a report is plain foolish and Col (ret) Strobridge should reconsider. Our nation has accrued huge future financial obligations that are not supported by any revenue stream. Recent politics has made this situation even worse. Revenues must be raised and benefits must be cut. We can support serious inquiry into this indisputable problem or we can stick our heads in the sand. A study can make evident all arguments on a topic for reasoned deliberation. I support thinking and studying, not hiding from the issue of unmet future financial obligations. Please do better next time.
