The Roth Tax-Deferred Account (TDA) recently joined the traditional TDA as a retirement savings option available through The Texas A&M University System, giving you even more choices when it comes to saving for your retirement. You can now make contributions on a pre-tax basis, after-tax basis, or a combination of the two.
Unlike a traditional TDA, Roth TDA contributions are subject to income taxes before they are invested in your TDA account. But here’s the upside: In return, you can withdraw your contributions and any earnings tax-free when you retire, provided you meet the criteria set by the IRS. This could mean more in your retirement paychecks.
“Both savings vehicles have their advantages,” said Sheri Meyer, retirement coordinator for System Human Resources. “Which one is optimal for you depends on your personal set of circumstances as well as your savings goals. A tax advisor can assist you with your decision to choose the best option for you.”
To get started, Meyer suggests considering the following questions (the more you answer “yes,” the more likely the Roth TDA may be right for you):
How much can I contribute to a Roth TDA?
For most employees, you can contribute a combined total of $15,000 to a
Roth TDA and regular TDA in 2006. If you are at least 50 years old, you
can contribute an additional $5,000. In some cases, you can contribute
another $3,000 if you have at least 15 years of service with the A&M
System.
When can I begin receiving distributions?
You can begin receiving distributions without paying federal income tax
as early as age 59½, provided your Roth TDA account has been intact
for at least five years. You can also begin receiving distributions if
you become disabled. If you die, your beneficiaries will receive the
distributions.
You are required to receive your minimum distributions once you reach age 70½. If you prefer, you can roll your Roth TDA contributions and earnings to a Roth IRA, which has no minimum distribution requirements.
How will contributing to a Roth TDA instead of a traditional TDA
affect my take-home pay?
It could reduce it. Unlike a traditional TDA, contributions to a Roth TDA
do not reduce your taxable income, which means the amount of federal income
tax withheld from your paycheck is not reduced, so you’ll actually
be paying taxes on a higher amount with a Roth TDA than you would with
a traditional TDA. The following example shows how participating in each
type of TDA can impact the take-home pay of a person with an annual gross
income of $50,000.
| Traditional TDA | Roth TDA | |
|---|---|---|
| Gross income | $50,000 | $50,000 |
| Traditional TDA contribution | - $5,000 | N/A |
| Taxable Income | $45,000 | $50,000 |
| 25% income taxes | - $11,250 | - $12,500 |
| After-tax income | $33,750 | $37,500 |
| Roth TDA contribution | N/A | - $5,000 |
| Take-home pay | $33,750 | $32,500 |
Your income level determines whether you qualify for certain tax credits and deductions, such as student loan deductions, medical expense deductions and child care tax credits. Since Roth TDA contributions do not reduce your adjusted taxable income, you should consult a tax advisor to evaluate whether changing participation from a regular TDA to a Roth TDA could affect your ability to qualify for these tax reductions.
Does the Roth TDA offer an advantage over the Roth IRA?
Two, actually. First, you can’t contribute to a Roth IRA if your
adjusted gross income exceeds a certain amount. The Roth TDA has no such
restriction. Second, you can contribute significantly more to a Roth TDA
than you can to a Roth IRA. For 2006, you can contribute up to $15,000
to a Roth TDA ($20,000 if you are at least 50 years old), but only up to
$4,000 to a Roth IRA ($5,000 if you are at least 50 years old).
How will my participation in a Roth TDA affect my Social Security
benefits when I retire?
Your Social Security benefits will be taxed if your taxable income exceeds
a certain limit. Distributions from a traditional TDA count as taxable
income for Social Security purposes. Distributions from a Roth TDA do not,
so contributing to a Roth TDA may actually help reduce your taxable income
later, thereby minimizing income taxes on your Social Security benefits.
Are rollovers allowed?
Yes, you can roll your contributions and earnings to another Roth TDA or
a Roth IRA after leaving employment with the A&M System.
Is it true that the Roth TDA may not be available in a few years?
It’s possible. The Roth TDA is a provision of the Economic Growth
and Tax Relief Reconciliation Act of 2001, which expires in 2010. Congress
could make this provision permanent, especially if the Roth TDA proves
popular. If it does expire, your contributions and earnings would remain
in your account, but no further contributions would be allowed. Of course,
you would still receive your distributions tax-free provided you meet the
previously stated criteria set by the IRS.
Getting started
To begin or change your Tax Deferred Account (TDA) options, fill out the
TDA Salary Reduction
Agreement/Change of Vendor Form (HR17) on the System
Human Resources web site and
return it to your Human Resources or Payroll office for processing. All
full-time and part-time employees are eligible to participate in the
TDA program.
This article is intended to explain the Roth TDA and its advantages. Before
enrolling, you may want to consult a tax advisor to find out whether a
Roth TDA is right for you. 