What are the differences between TSP and Roth TSP? Should a federal employee put money in take advantage of the Roth Thrift Savings Plan (TSP) or no? The TSP is a big part of FERS retirement and it could benefit every federal employee to take a few minutes to learn the differences and evaluate what their best option is….(read more)
LEARN MORE ABOUT: Thrift Savings Plans
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
TSP or Roth TSP: Which Retirement Savings Plan is Right for You?
As a federal employee, it’s likely that you’ve heard of the Thrift Savings Plan (TSP), a retirement savings plan available to members of the military and federal government employees. While the TSP is a popular option for many, there is also a Roth TSP available. So, how do you decide which is the right plan for you?
TSP
The TSP is a traditional retirement savings plan, meaning that it allows you to save pre-tax dollars. This can greatly reduce your taxable income, as contributions are made before taxes are taken out of your paycheck. Contributions made to the TSP also grow tax-deferred, so you will only pay taxes when you withdraw the funds during retirement.
One of the benefits of the TSP is the low expenses compared to other retirement plans, with the average expense ratio around 0.04%. The TSP also offers a variety of low-cost investment options, including lifecycle funds that are automatically adjusted to your retirement date.
Another advantage of the TSP is the availability of employer contributions if you’re a federal employee. Under the Federal Employees Retirement System (FERS), the government will contribute up to 5% of your salary to your TSP account, in addition to the contributions you make.
Roth TSP
The Roth TSP is similar to the TSP in that it is a retirement savings plan, but there are some key differences. Unlike the TSP, the Roth TSP allows you to save after-tax dollars. While this means that your contributions won’t reduce your taxable income in the short-term, it also allows for tax-free withdrawals during retirement. This can be particularly beneficial if you expect to be in a higher tax bracket during retirement.
Another advantage of the Roth TSP is that there are no income limits for contributions, whereas traditional Roth IRAs have income limits. Additionally, the Roth TSP allows for tax-free withdrawals of both contributions and earnings, whereas traditional Roth IRAs require the account to be open for at least five years before earnings can be withdrawn tax-free.
The Bottom Line
Deciding between the TSP and Roth TSP ultimately depends on your individual financial situation and goals. If you want to reduce your taxable income now and are unsure if you’ll be in a higher tax bracket during retirement, the traditional TSP may be the better option. If you’re comfortable paying taxes on contributions now and anticipate a higher tax bracket during retirement, the Roth TSP may be more advantageous.
It’s always a good idea to speak with a financial advisor to determine the best retirement savings plan for your individual needs. By making the right choice between these two great plans, you can be on track for a secure and comfortable retirement.
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.
Hi! I have a question, I have traditional and Roth balances… do I need to make any adjustments/ changes to my Roth TSP account, I don’t see the roth Acct growing except for my contributions??
I contribute the max to tsp traditional. The only way I can afford to do the max contribution is contributing to traditional. I'd rather contribute the max to traditional so that every single dollar is being invested in the market now. For example, if I was only contributing $500 to Roth instead of 1000 to traditional only 500 would be working. I'll also add that I'm single, I'll have a guaranteed Federal pension and my fehb health benefits to take into retirement with me. And I'll have no heirs or relatives or spouse to leave the money to After I'm Gone. What's going to work for me is I'm going to draw down my tsp from when I retire at 60 until I reach 70. And while I'm drawing down my tsp I'll let my Social Security grow at 8% a year until I start pulling that when I'm 70. At that point my tsp will have all been drawn down and or converted to Roth. And my Social Security will be at its maximum at age 70 when I start pulling it.
Awesome video!! Just the start of this yr 2021 I moved to all Roth…seriously wish I had done this move at day 1!!! I'm 33 yrs old and have been investing last 5yrs and increase my contribution 1% every yr!! I'm currently now at 13%!! My plan is to get to 15% then keep it there for the rest of my career!! Thanks for the info I'm highly thinking about moving the Roth tsp over to a Roth IRA once I retire that way I can avoid RMDs and get the money to grow even higher until I need the money withdrawn!! Also as you said a major benefit to passing it down to someone then you don't burden them with massive taxes to be paid on it!! Us in essence they can hold it till they retire!! Then let's say you give then a million they hold that for 20yrs in the same investment option that could grow to upwards of 5+ million when the take ot out or more depending on the investment options they chose to have it in!!!
I thought there was no RMD with Roth tsp ?
Thank you! I am new to your channel, keep up the good work.
Great coverage on the particulars. I tend to think that it’s not an either-OR calculus, rather it is both-AND. TSP is great for tax deferral, but at some point along one’s savings path one may have accrued significant Traditional (TSP/401k/IRA) balances and RMD mitigation and management becomes paramount, as you note in this episode. This episode will also tie in well with an episode on partial conversions from Traditional to Roth accounts, another RMD mitigation approach.
Great job on this Brad!