Thrift Savings Plan explained. Should you chose the Roth TSP or Traditional TSP? Roth TSP is typically better for those who start investing early and often. Traditional TSP is better for those that are older or closer to retirement and have not invested at all.
This is because there is one deciding factor that makes Roth or Traditional better than the other: income tax. Roth means you pay taxes now and don’t owe any taxes later. Traditional means you defer paying taxes now and pay them when you withdraw from your TSP. You’re going to take a tax hit now or later… so will your income tax bracket be lower now or later? If you think you’re going to retire “better off” and generate more income in retirement then you do now, then do Roth TSP. If you only plan on collecting social security and maybe a small pension, therefore, you’re retirement income will be less than it is now, do Traditional TSP. As a loose rule of thumb I would say if you are within 15 years of retirement or only plan on investing 5% or less of your salary then do traditional. For everyone else Roth is probably a better option.
There are a few additional bonuses for doing the Roth TSP. The biggest advantage is when you leave federal employment you can transfer your Roth TSP to a Roth IRA. A Roth IRA has the most benefits out of any retirement account. Inside a Roth IRA there are no Required Minimum Distributions (RMDs). Another benefit is when you pass away whoever inherits the Roth IRA won’t have to worry about paying any taxes. Last benefit is you take out the risk that income tax rates could possibly get higher years from now when you go to retire. The United States is in 28 trillion dollars of debt and counting. Tax rates may go up.
Q&A
-You can still get the government match whether you do Roth or Traditional. The government match has to go into Traditional. But you can do all Roth with your entire contribution.
-The max you can contribute is $19,500 (can be a mix of Roth and Traditional) and that doesn’t include the government match.
-You will NOT get the match if you did not opt into the BRS. But you can still contribute to the TSP.
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00:00 Intro
00:38 Roth vs Traditional
02:22 The Numbers Breakdown
04:58 Bonuses for Roth TSP
06:30 Q&A…(read more)
LEARN MORE ABOUT: Thrift Savings Plans
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Roth TSP vs Traditional TSP (TSP Explained)
The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and military personnel. It offers two options for contributions: Roth TSP and Traditional TSP. Understanding the differences between the two can help you make informed decisions about your retirement savings.
The primary distinction between Roth TSP and Traditional TSP lies in how contributions and withdrawals are taxed. Traditional TSP contributions are made with pre-tax dollars, which means that your taxable income is reduced by the amount you contribute. On the other hand, Roth TSP contributions are made with after-tax dollars, so you do not receive a tax deduction for contributions.
When it comes to withdrawals, Traditional TSP distributions are subject to federal income tax. The tax is applied to the entire amount withdrawn, including both contributions and earnings. Conversely, Roth TSP withdrawals are tax-free, provided certain requirements are met. To qualify for tax-free withdrawals from Roth TSP, you must have had the account open for at least five years, and you must be at least 59 ½ years old or meet other specific criteria.
So, which option is right for you? Here are a few factors to consider:
1. Current and Future Tax Rates: If you anticipate being in a higher tax bracket during retirement, contributing to a Roth TSP may be advantageous. Paying taxes now at a lower rate can save you money in the long run. Conversely, if you expect to be in a lower tax bracket in retirement, Traditional TSP contributions may provide immediate tax savings.
2. Time Horizon: The longer you have until retirement, the more time your investments have to grow. Roth TSP contributions are made with after-tax dollars, allowing your contributions and earnings to grow tax-free. This can be especially beneficial for individuals with many years until retirement.
3. Income: Roth TSP contributions have income limitations, unlike Traditional TSP. If your income exceeds the thresholds set by the IRS, you may not be eligible to contribute to a Roth TSP. However, there are no income restrictions for Traditional TSP contributions.
4. Estate Planning: Roth TSP can offer estate planning benefits. Since Roth TSP withdrawals are tax-free, they are not subject to income tax for your beneficiaries. This can provide a significant advantage if you wish to leave a tax-free inheritance.
It’s important to note that you can contribute to both Roth TSP and Traditional TSP simultaneously. This allows you to diversify your retirement savings and potentially mitigate future tax risks.
In conclusion, Roth TSP and Traditional TSP provide different tax advantages and considerations. Analyzing your current financial situation, expected future tax rates, and retirement goals can help you determine which option best suits your needs. Consulting with a financial advisor can also provide valuable guidance in making this decision. Whichever option you choose, saving for retirement through TSP is a wise step towards securing your financial future.
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i dont need a pretax row boat ,drip dragster and and way to pay that gd 50 percent.
I'm 52 and probably would be looking to retire at 65; taking inflation into account, would a Roth be a better choice?
Thank you so much this really helped
100% ROTH is the best option. I'd rather pay taxes now than when I don't work.
The 5% match automatically goes into the traditional so wouldnt it be an advantage to contribute to traditional so that your contribution and the match grow together instead of seperately. Also the tax break you get from contributing to traditional you could use those savings to invest into a roth ira.
Before blanket statements are made comparing Roth to Regular TSP you must know EXACTLY how the state you work in now taxes the pension of a federal civil servant. Approx. 9 states that normally have income taxes (e.g. NY and PA) consider the TSP "part of" their civil servants pension and DO NOT tax it on withdrawal in retirement. This is significant because if you work in one of these states (and assuming you will retire there) and contribute to the regular TSP – you can escape state taxes altogether (which are not insignificant in states like NY) by contributing to the regular TSP. As unbelievable as it seems the money is not state taxed going into the regular TSP AND it is not state taxed when withdrawn as it is considered "part of" the civil servants pension in these states. However – if you contribute to the Roth TSP – you will pay state taxes on the money going in. Everything else being equal- you are actually losing money by contributing to the Roth TSP instead of the regular TSP in these states.
I'm a 31 year old VA employee. My current TSP contribution is 3% Roth and 2% Traditional. I'm a GS-6 but am going to graduate school to become a social worker. After graduation, a VA social worker who isn't licensed is at GS-9, and after getting licensed, can go to GS-11 and then GS-12 for a senior social worker. I anticipate being with the VA until 60-65. Should I change my TSP contribution all to Roth at this time and as I climb the GS ladder?
So if I’m on the Roth tsp at 10% and the government is matching 5%, that 5% goes into the traditional tsp? Meaning I won’t be paying the taxes on my own contributions but the governments 5% will get taxed?
I have contributed in traditional tsp for 15 years but now notice the benefits of a roth. If i start roth now instead of traditional will I have two separate balances or does it keep growing as one while all is invested in C fund? I do 15% I have 200k in traditional. Thx
Can you contribute to both, for tax reduction purposes?
I recently switched from traditional to Roth but it tsp is showing it as more of a savings account and only seems to be using the traditional money for investment. Does this seem right to you?
roth tsp all the way
Man I’m lost I’m I started contributing in Traditional tsp at 36 I’m 41 now not sure if I should stay in traditional or switch to Roth! I got at least 20 more years of work!
Can you roll over all my savings from a traditional tsp over to a Roth tsp
Love the way you explained the difference.
How to rollover your tsp to Roth IRA, I will retire in two years and would like to roll it over to Roth IRA. I contributed to Roth IRA just $50 every pay period which equal to $100 a month, but I contribute to TSP at 15%.
I have 3 more years until I retire at age 65. These last years will be with IHS (for a total of 5 years Fed service). I have been contributing 15% in both the TSP and the Roth. I wonder if it would be better to contribute more to the TSP and less to Roth since I'm pretty sure I will be in a lower income bracket when I retire in 3 years.
Thanks for the video!
What are your thoughts on transitioning from a traditional TSP to a roth?
I've been contributing to my Traditional TSP for 3 years, but figured I'll be at a higher income when I retire, also still in my 20's which seems to be pointing towards ROTH TSP. Thanks!
This is a great breakdown, thank you so much!
Thanks for a great video. I don't anticipate working for the govt until retirement, and I read that we can still keep our money in TSP even if we leave federal service early, and with lower fees, that could be a good choice. I would like to start investing in TSP Roth in addition to the traditional TSP, but not sure if this is unwise if I leave in a year or two. Any insight you have on this would be much appreciated!
Hello, I’m 48 and currently have 15 years of federal service of which I have been contributing for only 10 years with a 10% contribution. I’m recently moved from a GS9 to a GS11. Would a Roth still be more beneficial for me with my late start? Thanks
What if I start of with the traditional so I can get a match on my savings I put in and then switch to the Roth after I do my 4 years?
I also invest too
Sorry if I missed this, but can I still get the "Employee Match" if I am contributing 15% of my base pay to the *Roth TSP*?
I have my Traditional TSP open, but am not making any contributions since all of my contributions are going into my Roth. However, I still want to receive that match capability.
Hi. You confused me when you said if I don’t sign up for the traditional I’ll still get matched? This was spoken at 6:40… can you clarify? I’m interested in Roth TSP but I still wanna get my 5% match so should I do both Roth TSP and Traditional?
How do I choose which funds within the Roth TSP to invest in? What are they? My normal TSP, I’ve chosen the c, s, and i for best growth. Who’s in control of how the Roth grows?
Taxation is theft.
1. Military should ONLY contribute to the ROTH TSP when deployed to CZTE area (combat zone). The combat zone tax exclusion means you skip the tax man entirely with Roth TSP. With a traditional TSP you will pay tax on all earnings upon withdrawal. CZTE will also virtually guarantee eligibility for IRS Saver's Tax Credit.
2. Military should seriously consider Savings Deposit Program (SDP) while in a combat zone. Guaranteed 10% return with zero risk and must close account NLT 90 days after departing combat zone.
3. Remember to see if your TSP contributions qualify for the Saver's Tax Credit. Up to 50% of what you contribute may be cut from your income tax bill. The annual max tax credit is $2,000 per person ($4,000 married). Anyone with less pay than E8 over 18 years qualifies for some Saver's Credit (10%-50%).
4. The 3:18 calculations used to determine Roth TSP contributions are rather misleading. It infers a contribution limit where no limit exists. Individuals are free to max out their Roth TSP ($19,500 for 2021). The Roth TSP calculation becomes much more favorable when the Roth figures are the same number as the traditional figures (i.e. both $5,000). Mil pay is different than civ pay in that housing and subsistence really aren't part of AGI. BAH and BAS will still cover all the essentials. Only the basic pay "take home" would be 2.5% less.
5. The Roth TSP has significant advantages over the traditional TSP if money is needed before age 59.5 for a hardship or first home purchase. Roth contributions (not earnings) may be withdrawn before age 59.5 without IRS penalty and no federal tax payment. Traditional TSP contributions withdrawn before age 59.5 require federal tax payment and an additional 10% IRS penalty. A TSP Loan is usually better than an early withdrawal but a hardship withdrawal from a Roth TSP is light years better than a hardship withdrawal from a traditional TSP. Yet another reason military under age 50 should go with the Roth TSP.
6. Most military vets go on to higher tax brackets after leaving the service and there is more than a 50-50 chance that taxes will increase. (65% of U.S. will see increase when the 2017 tax cuts expire in 2025) It makes more sense to go with the Roth TSP and pay federal taxes today while still in that lower tax bracket and have that lower tax rate. Why wait until you're making more (higher bracket) and the IRS is charging more (higher rate) so Uncle Sam gets to take even more?
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I know there is a $6K Roth IRA contribution limit. Does that limit still apply in the Roth TSP or can I contribute the entire $19,500 into the Roth TSP?
This decision has been keeping me up at night. I know I’ll have a lower tax bracket when I retire, but I keep hearing Roth is better. The part I’m stuck on is that the growth within the Roth is tax free, which is going to be the majority of your money in 30 years. Is traditional still better for someone like me with a high tax bill now?
What if I contribute to both is a that still a good choice?
Great explanation with examples
Good info! Considering the national debt that you mentioned plus current government spending … realistically higher taxes are in our futures.