Retirement Benefits Institute has trained thousands of federal employees as they make plans for federal retirement. For more information about your federal retirement benefits, go to our website at to get support.
The information contained in this video should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor….(read more)
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TSP Vs ROTH: Side by Side Math Calculations
One of the most common dilemmas when it comes to retirement planning is deciding between contributing to a Thrift Savings Plan (TSP) or a Roth account. Both options have their benefits and drawbacks, but ultimately understanding the side by side math calculations can help you make an informed decision.
First, let’s take a closer look at each retirement savings account:
1. TSP (Traditional): The TSP is a tax-deferred retirement savings plan available to federal employees and members of the uniformed services. Contributions are made pre-tax, meaning they reduce your taxable income in the year they are made. However, withdrawals during retirement are taxed at your ordinary income tax rate.
2. Roth IRA: Roth accounts are available to individuals regardless of their employment status and are funded with after-tax dollars. This means contributions are made with money that has already been taxed. The main advantage of a Roth IRA is that qualified distributions are tax-free in retirement.
Now, let’s break down the math calculations for each retirement account, assuming you are considering contributing $6,000 annually for 30 years:
1. TSP (Traditional):
– Initial Contribution: $6,000
– Annual Tax Savings (Assuming 22% tax bracket): $1,320 (=$6,000 x 0.22)
– Net Cost of Contribution: $4,680 (=$6,000 – $1,320)
– Earnings Growth (Assuming 7% annual return): $361,802 (=(($6,000 – $1,320) x (1+0.07)^30) – $6,000)
2. Roth IRA:
– Initial Contribution: $6,000
– Earnings Growth (Assuming 7% annual return): $503,056 (= $6,000 x (1+0.07)^30)
Looking at the calculations above, it appears that the Roth IRA comes out ahead in terms of total earnings. However, it is important to consider the tax implications in retirement.
In the case of the TSP, withdrawals are subject to ordinary income tax rates. Assuming you withdraw the funds at a 22% tax bracket in retirement, the final after-tax value of your TSP balance would be $282,216 (= $361,802 x (1-0.22)).
On the other hand, if you plan strategically and withdraw funds from your Roth account, you won’t have any tax consequences. In this case, the total after-tax value of your Roth IRA balance remains unchanged at $503,056.
Based on these calculations, the Roth IRA seems to be the clear winner in terms of total after-tax value. However, it’s important to note that the TSP may be more advantageous for individuals in higher tax brackets during their earning years, as it allows for immediate tax savings.
Additionally, consider your current and future tax situations. If you believe your tax rate will be lower in retirement, the TSP may be a better option. Conversely, if you anticipate being in a higher tax bracket during retirement, the Roth IRA may offer more benefits.
Ultimately, the decision between TSP and Roth IRA depends on your individual circumstances and financial goals. It is recommended to consult with a financial advisor who can help you evaluate your specific situation and make the most beneficial choice for your retirement savings.
Something else to keep in mind is Social Security taxation. Traditional funds will be calculated in to establish what your provisional income is and how much your social security benefit will be taxed. Roth funds are NOT included in as provisional income meaning less of a tax placed on your social security benefit.
ONE very important consideration that MUST NOT be ignored BUT really conplicates this calculation is a notion that when you RETIRE you are in effect in a TOTALLY ALIEN
TAX (and income-based variable fees for retirement benefits) ENVIRONMENT.
Such things as IRMAA, RMD's, 0%/50%/85% taxability of SS income are not a consideration when you are younger BUT become a serious matter in retirement.
If you had done 100% ROTH contributions throughout your life, such assets/income are NEVER used to calculate IRMAA, RMD's, 0%/50%/85% taxability of SS income.
But if you wait til retirement and start pulling money out of your TAXABLE retirement accounts to meet your spending needs, this notion that it doesn't matter what you invest in whether Traditional or ROTH retirement accounts, the reality of our FEDERAL TAX CODE will HIT YOU IN THE FACE with HIGHER IRMAA, RMD's, and taxability of SS income for the REST OF YOUR RETIREMENT LIFE.
With the traditional youre also adjusting your annual gross income lower for thr year giving you a tax break year to year. This needs to be factored in as well. Also the agency match always goes directly to the traditional. Thats why i am just sticking with the traditional letting it grow as big as possible.
Very good comparison, only issue I’m planning on being down to 10 or 12 percent tax bracket in retirement.
With married couples having a $25,000 standard deduction plus going through the 10% and 12% federal rate first, you don't start paying 22% until your income is around $115,000.
Your actual federal tax rate is just under 10% on that $115,000.
You are making people believe they are paying the marginal rate, when in reality they are paying the effective rate.
Excellent demo. When I’m doubt go to the numbers. I am starting to contribute to the Roth tsp so I have options when I retire.
Bonus for those whom will retire outside of the U.S. Roth TSP often are covered in bilateral tax treaty as a government pension other than Social Security. In most cases, such government pension are taxable only by source country for U.S. Citizens. If you have a Roth TSP, it'll only be taxable in the U.S. and since U.S. treats it as tax free, it'll be tax free in both the U.S. and the country you are living in.
For normal IRA, Roth IRA, 401(k), etc., which are not government pension, the primary taxing authority is with the resident country. Therefore, it is taxed first in the country in the country you live in, but also taxable in the U.S. as U.S. citizen. The problem is that all but 8 tax treaties with the U.S. do not directly or indirectly recognize Roth IRA as a tax free account thus in most cases, you are taxed on the earnings on a Roth in the host country. Fortunately for those whom didn't roll over their Roth TSP to a Roth IRA, because Roth TSP is a government pension, it usually remains tax free.
The same idea applies to governmental 457(b) plan and governmental 401(a) and governmental 403(b) often offered by state and local government employees. They are usually only taxable in the U.S. for U.S. citizens residing abroad because it is covered by the same article as government pension. If you have a Roth 457(b) or Roth 403(b) plan and plan to retire overseas, it is usually more beneficial to keep it there instead of rolling it over to a Roth IRA for that reason.
Adjusting for the taxes up front effect with the Roth contribution made the take home pay hit less painful. The best part with Roth is your balance is YOUR balance. The tax code got us really comfortable with growing the tax liability with time.
This is the same video you posted yesterday but why delete the original? Oh well