Investing in a pre-tax/traditional IRA means you pay no tax on the contributions. Future withdrawals from the account will be subject to income tax at ordinary rates, even though the withdrawal will consist of contributions and earnings/profits those contributions generated. The more-favorable capital gains rates to not apply to the earnings portion of the withdrawal.

With that said, investing in an after-tax Roth IRA means you pay income tax, at ordinary rates, on the contributions, and if the account has been opened for at least five years and you have attained age 59.5, the earnings portion of the withdrawal is tax-free.

Because you have already paid tax on contributions, the contributions may be withdrawn at any time regardless of age. This makes the Roth IRA an excellent emergency fund.

More Roth IRA Facts:

  1. At age 72, the owner of a Roth IRA is not subject to taxable Required Minimum Distributions (RMD) because the owner has already paid tax on the contributions, and the earnings portion of any withdrawal is also tax-free because the account is at least five years old and the owner is past 59.5.
  2. The Roth IRA owner need not make any withdrawals during his/her lifetime.
  3. Facts 1 and 2 apply to a spouse-beneficiary of a Roth IRA.
  4. A non-spouse beneficiary of a Roth IRA must make tax-free withdrawals of the entire account balance within 10 years of the death of the owner.

Roth accounts administered by 457(b)/401(k) and 403(b) plans are subject to RMDs at age 72. While such distributions are tax-free, the earnings/profits generated by the re-investment of the RMD are subject to income tax. This is why, in conjunction with retirement, the owner of a Deferred Comp Roth account should roll the account balance into a Roth IRA.

The Thrift Savings Plan (TSP) is the defined-contribution companion plan to the Federal Employees Retirement System (FERS), a defined-benefit plan. As with all defined-contribution plans, TSP participants may annuitize, at their discretion, their account balances.

With that said, I was curious to know why the TSP named MetLife as its annuity provider when it could have designated the FERS, with its superior annuity rates, as the provider. I proceeded to do some research and found out the law specifically requires the TSP to use a private life-insurance company as its annuity provider. See 5 US Code section 8434 (d). This statute needs to be amended in order for the FERS to become the annuity provider for the TSP. I was told there are no plans to request such legislation at this time.

That being said, MetLife will guarantee a 65-year-old $6,240 per year for each $100,000 annuitized, while the FERS would guarantee the same individual about $10,000 per year.

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at

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