Is a Roth IRA right for you?

October 20, 2010 — Are you considering a Roth IRA? And how does a Roth fit into your Thrift Savings Plan and the Voluntary Contribution Program?

Tax expert Bob Leins of the National Institute of Transition Planning said when deciding between a traditional and Roth IRA, a Roth is generally the smarter move, Leins said.

Contributions to a traditional IRA are tax-deductible, but you must pay taxes on the earnings upon withdrawal. While contributions to a Roth are not tax-deductible, you do not have to pay taxes on the earnings. However, there is an income ceiling for the Roth.

Leins noted that before this year people could not transfer more than $100,000 from a traditional to a Roth IRA. That restriction was lifted on Jan. 1, but people must still pay taxes on the traditional IRA earnings.

Federal employees also have an opportunity to roll the traditional IRA contributions into their Thrift Savings Plan, Leins said.

Feds should also be aware that, possibly as soon as 2011, there may be a Roth option for TSP.

Feds in the Civil Service Retirement System and CSRS Offset have yet another option to get the most out of their retirement funds. Available to 20 percent of feds, the Voluntary Contribution Program offers 3.125 percent interest in 2010. Leins said that VC contributions can be rolled into a Roth, with tax on the earnings.

In last week’s Your Turn, federal benefits expert Tammy Flanagan said the VCP has been a popular vehicle to contribute to the Roth. She said IRA contributions are limited to $5-6,000 a year. But with VCP, feds can put in up to 10 percent of their total lifetime salary. Once the VC account is set up, they can immediately transfer those funds to a traditional or Roth IRA, Flanagan said.

Leins can be heard on Federal News Radio’s For Your Benefit Mondays at 10 a.m.

Life insurance options
Mike Causey also spoke with John Montague, of not-for-profit Worldwide Assurance for Employees of Public Agencies (WAEPA), to explain federal employees’ options for life insurance.

More than 95 percent of feds have accepted the basic life insurance through FEGLI — Federal Employees’ Group Life Insurance Program, the largest group life insurance program in the world. The basic plan is based on the annual salary rounded to to a thousand, plus $2,000, Montague said.

About 30 to 40 percent of feds covered under FEGLI have chosen one of the program’s coverage options, Montague said.

Although many formulas exist about how much life insurance coverage is enough, Montague said the decision really depends on that person’s life situation.

“It’s really an individual decision. Everyone has individual obligations, individual responsibilities,” he said.

Montague added, “A lot of people look at that calculation and a lot of times overlook the contribution of the spouse. When you look at the insurance needs, you have to look at the whole family unit.”

Although popular, FEGLI might not be the best option for everyone.

“If you’re in good health, there’s a pretty good chance that you can find a better rate,” Montague said.

When shopping for life insurance, Montague said to look for a company with an excellent industry rating. Also, don’t leave FEGLI until you have purchased and are accepted by another insurance policy, he said.

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