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When it comes to saving for retirement, there are many options available, including Traditional TSP and Roth TSP. Both plans offer unique benefits and drawbacks, making it essential to understand the differences between them to make an informed decision.
Traditional TSP
The Thrift Savings Plan (TSP) is a government-sponsored retirement savings plan available to federal employees, including military personnel. Traditional TSP contributions are made pre-tax, which means that the money you contribute is not taxed until you withdraw it in retirement.
One significant advantage of Traditional TSP is that contributions can lower your taxable income. Additionally, the money you contribute grows tax-deferred, allowing it to compound over time. However, when you withdraw the funds in retirement, they are taxed as ordinary income.
Another benefit of Traditional TSP is the ability to take out a loan against your account balance. This can be helpful in times of financial need, such as paying for unexpected medical bills or home repairs. However, if a loan is not repaid, you may face penalties and taxes.
Roth TSP
Roth TSP contributions are made after-tax, meaning that the money you contribute is taxed upfront. However, the contributions and earnings grow tax-free. This means that when you withdraw funds in retirement, you will not pay taxes on either your contributions or earnings.
One significant advantage of Roth TSP is the flexibility it provides. Because there are no required minimum distributions (RMDs), you can leave your funds in the account for as long as you want. Additionally, withdrawals in retirement are tax-free, making it an excellent option for those who anticipate being in a higher tax bracket in retirement.
Another benefit of Roth TSP is the lack of income restrictions. Contributing to a Roth IRA or Roth 401(k) is limited to individuals who earn below a certain income threshold. However, Roth TSP has no income restrictions, allowing higher earners to take advantage of the benefits of a Roth account.
Which is right for you?
Ultimately, the decision between Traditional TSP and Roth TSP comes down to personal preference and financial goals.
Traditional TSP may be a good option for those who anticipate being in a lower tax bracket in retirement. Additionally, if you need funds in the short term, a Traditional TSP loan may be more advantageous.
Roth TSP may be a good option for those who anticipate being in a higher tax bracket in retirement. Additionally, with no required minimum distributions, it provides more flexibility in retirement planning.
It is essential to consult with a financial advisor to determine which plan is the best fit for your individual situation. Regardless of which plan you choose, the key is to start saving for retirement as early as possible. By setting aside funds now, you can ensure a more comfortable retirement later on.
Great information. However, to apply it, one needs to consider the distribution options TSP has. It appears to me that one cannot choose to withdraw x amount of dollars from one's traditional TSP and x amount of dollars from one's Roth TSP, or only funds from traditional TSP or only funds from Roth TSP, rather when one requests a withdrawal, TSP apportions the withdrawal from both your Traditional and Roth holdings based on what percentage of Roth and Traditional makes up your total TSP holdings. Is my understanding correct?
Please stop saying “right” every other sentence. It’s annoying, “right?”
Very good info. Thanks to people like you and other food financial advisors, I have since started switching from traditional to Roth in my TSP. Too bad I didn't research this before putting $60k into my traditional side in my TSP. From here until around 15 years from now, it's going to be all Roth (future contributions). Once I turn 59 and a half, I'm most likely going to transfer my TSP retirement into a IRA, then roll it into a Roth IRA within that same broker. I'll be getting some financial advice before I make such a huge decision though. You don't want to be moving so much money before a pro analizes and tells you all the pros and cons. Thanks for another wonderful video and info!
Dallen, simple question? Four years to retirement, wife six years, both government workers. I was thinking of switching us both over to Roth to have more cash at our disposal when we retire. Is this a smart move? No other reason, just more cash to pay off cars or other bills.
Love your videos and thanks for your time and great advice!
Hello boss man. More videos is see more confused I get. If u live in tax free state then Traditional TSP May be better but u have to pay federal taxes correct?
What percent is the federal tax u have to pay. I think I’m in the 22 percent tax bracket so Traditional works better? Thanks please reply.
I really enjoy your videos.
I want to maximize my Roth TSP, but also maximize the agency match on my traditional account. With the new '22 limit now at $20,500, that's $788 per pay period. How do I split the $788 to maximize Roth and still ensure the full match on the traditional TSP?
Does taking money out of a Roth TSP raise your Adjusted Gross Income like the normal TSP? I would be taking out after 59 1/2 to avoid penalties.
when figuring out the FRES employee's high three, do you include the locality pay or just basic pay in the calculation?
Dallen, love the videos and help you provide. I plan on retiring next year at my MRA. I have a relatively small Roth outside of the TSP and just started putting money into the ROTH TSP to start building more tax free money for later in life or for my heirs. My first Roth TSP contributions just went in this last pay period but when looking at my TSP account online, it does not distinguish between Traditional and Roth. I plan to transfer a good portion of my TSP over to an IRA upon retirement. I was thinking of leaving the ROTH TSP in the TSP until 72 and then rolling that over. How would I know how much of my money is traditional vs Roth when I want to move that money? Also it appears any interfund transfers apply equally to both accounts. Seems like another of the negatives about the TSP. Thanks! Wayne
I've invested roughly around 30k on my tsp back when i was active duty back in 2004. I just left it there and forgot it not knowing how it's doing. I want to withdraw all of it but im out of the country. How can i access it?
Except for the low TSP fees, the ROTH IRA has so many advantages, e.g., no RMDs ever. Although you could roll-over ROTH TSP into ROTH IRA.
Right on time.
Hey dallen, A usps employee….they changed the 5% match…its 3% dollar fer dollar, 2% 50 cents on the dollar. What nerve…use to be all 5%..match..30yrs +…in service time to go….