Tax code problem ensnares Drake proposal

WASHINGTON

As millions of Americans scrambled this week to file their federal income tax returns, U.S. Rep. Thelma Drake looked to create a new tax break for military personnel and federal civilian employees.

There was just one problem: A lot of service members - specifically those assigned to combat zones - already enjoy much of the benefit that Drake, R-Virginia Beach, hoped to give them.

Drake's spokesman, Travis Burk, acknowledged that the congresswoman's proposal was oversold in a news release and a statement Drake placed Tuesday in the Congressional Record. Drake's staff ran afoul of the complexities of the federal tax code in preparing those materials and her bill, the "Roth TSP Act of 2008," he said.

He said that in discussions between Drake's staff and the agency that administers the federal employees' Thrift Savings Plan, "a point was confused" concerning the bill's tax implications.

Drake's office quickly acknowledged the mistake after a Pilot reporter researching the legislation pointed it out.

Drake's bill would require that more than 3 million federal workers - uniformed and civilian - be allowed to channel a portion of their retirement savings into a special, tax-exempt account, similar to a Roth IRA.

Millions of people working in the private sector already have a choice between conventional and Roth IRA's and 401(k) plans.

The plans essentially offer a pay-now-or-pay-later choice. With a conventional IRA or 401(k), money set aside for retirement now is untaxed, but taxes are due when the savings and any money they earn are withdrawn after retirement.

With a Roth plan, the wage-earner pays taxes on the income when he or she i s paid, but earnings withdrawn in retirement are tax exempt.

The change could help thousands of federal employees, Burk said, but Drake saw a particular benefit for soldiers, sailors, airmen and Marines in combat.

The congresswoman aimed to give those troops the tax break at both ends.

Under federal law, their pay while in harm's way generally is already tax-exempt; in choosing the Roth Thrift Savings Plan option for their savings, they would escape tax payments on their withdrawals in retirement as well, she noted.

"The least we can do in return is provide our service members with choices and options that will allow them to plan for their future and help to ensure that they never have to worry about a secure retirement," Drake said.

But Tom Trabucco, a spokesman for the Federal Retirement Thrift Investment Board, which runs the Thrift Savings Plan program, said the law already shields from taxes any money a federal retiree withdraws from Thrift Savings Plan contributions - like combat pay - that originally were tax-exempt.

Trabucco said service members are subject to taxes on the interest and dividends their tax-exempt contributions earn while in their Thrift Savings Plan accounts however.

Drake's bill would shield those earnings, he agreed.

Dale Eisman, (703) 913-9872, dale.eisman@pilotonline.com