- The Washington Times - Tuesday, February 5, 2008

Should retirees who pay little or no federal income taxes be included in the $600 to $1,200 rebate plan now before the Senate?

The House version of the hurry-up economic stimulus package says no. It says retirees who don’t pay taxes shouldn’t share in the rebates.

But groups that represent retired Americans — who are a huge chunk of the people-who-actually-vote population — say it would be unfair and unwise to cut seniors out of the deal.

More than that, the National Association of Active and Retired Federal Employees is asking the Senate to consider another equity issue for older people. The NARFE wants the Senate Finance Committee to insert language that would change the tax code to permit retired people to pay their health insurance premiums with pre-tax dollars. Such a move, NARFE says, would give them a tax break currently available to working feds, and also permit them to purchase better, more inclusive health insurance.

The problem with extending the health insurance tax break — officially known as Premium Conversion — is cost. While it would save retired people millions of dollars in taxes, it would cut off an equal amount of money each year to the dwindling accounts of the U.S. Treasury.

Insiders say that while giving all retirees a piece of the rebate pie might be possible, it is a very long shot to expect this already politically preoccupied Congress to make major changes in the tax code.

Roth IRAs for feds

Investors in the federal 401(k) plan will soon have a third option in their Thrift Savings Plan: A Roth IRA.

Regular IRAs are funded with pre-tax money. That means when you start withdrawing the IRA, all the money you put in and (hopefully) earned with your investment is taxable at your then-current tax rate. With a Roth IRA, you put in money you have already paid taxes on and when you withdraw it, your contributions and any earnings — no matter how much — are tax-free.

Under the soon-to-be announced new option, TSP investors who are eligible to withdraw TSP funds either as part of an age-based in-service withdrawal or as a post-separation withdrawal, will have a third choice. In addition to putting that money in a traditional IRA, or into another eligible employer plan, they will also be able to put the money into a Roth IRA.

The same rules will apply to the Roth rollover. That is you must meet other IRS tests (like if your adjusted gross income is over $100,000 or if you are married but file separate returns). Also, you must pay taxes on the amount you are transferring to the Roth. For some people that will be a dream come true. For others it will not be a smart move.

Penny Moran, director of Participant Services for the TSP, said check with a solid financial planner before you take the Roth option. In an interview last week on WFED (AM 1050 radio), Ms. Moran said Roths provide a tax-free growth advantage. “But,” she said, “it’s a very individual situation and they need to understand where they think they are going to be in terms of their tax situation down the line.”

Look for an official announcement of the new Roth rollover option in mid-month. It will be posted on the thrift plan’s home page, which is www.tsp.gov. It also has information on another change coming in April that will restrict the number of times a month that investors can move money from fund to fund.

Although the number of so-called frequent traders is small — about 3,000 out of nearly 3.9 million accounts — interfund transfers are up, thanks to market swings and frequent use of the word “recession.” For example, last week we reported that in the week that included the Martin Luther King holiday the TSP recorded 63,000 interfund trades. Most of it was money fleeing the stock funds for the safe harbor of the Treasury-securities G-fund. While that number is only a fraction of the total investors, officials note that in a normal week between 9,000 and 12,000 people make trades.

Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey @federalnewsradio.com.

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