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The over-simplified explanation I have always received for why you should choose to invest in either traditional or ROTH accounts has always been if you have a high marginal tax rate now and will have a low marginal tax rate in the future: go traditional. If you have a low marginal tax rate now and will have a high marginal tax rate in the future: go ROTH.
I never liked this explanation and did the math in this video to control for as many retirement variables as I could to fully understand the mathematical difference between the two accounts.
My conclusion comes down pretty hard against the traditional TSP. With all things held constant, ROTH encourages people to save more and it guarantees tax free income after the age of 60. There is no downside. Anyone who earns less than $50,000 a year shouldn’t be paying more than 11% in federal income tax. If they succeed in growing a TSP retirement account in to the millions, then they will even with a conservative withdraw rate will be paying a marginal tax rate on that income in the 20% range.
In addition, wise and active planners/investors in their retirement SHOULD have multiple streams of income to allow them to retire in comfort (and hopefully as a millionaire). In retirement people could have a brokerage account, traditional or ROTH individual retirement accounts (IRAs), social security, rental income off owned properties, a part-time job or own a small business. Guaranteeing your government TSP as tax-free income in retirement should be a no-brainer.
There are a couple reasons why I could see someone wanting to invest in traditional now. They might be a high income earner now (over $100,000) and they want the tax savings so they can be more aggressive in their investing in other areas (brokerage account or real estate). Another reason is if someone is in a lot of debt or experiencing financial hardship and they need the tax savings today to better gain control over their finances.
The last reason why people might prefer traditional is that they do not expect to have a lot of money in retirement. They plan to have no other accounts, investments, or income sources beyond their TSP and Social Security and they know with their minimal withdrawals their annual income will never exceed $50,000 a year and they can stay in that low 11% tax income bracket. This feels like a bad retirement plan, but this is honestly what a majority of Americans do.
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#ROTHTSP #TraditionalTSP #ROTHvsTraditionalTSP
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ROTH TSP vs Traditional TSP – Which is Better?
When it comes to planning for retirement, one important decision you need to make is whether to contribute to the ROTH TSP or the Traditional TSP. Both options have their own benefits and considerations, which we will explore in this article. Understanding the key differences between the two can help you make an informed decision that aligns with your financial goals and circumstances.
First, let’s understand the basics. The Thrift Savings Plan (TSP) is a retirement savings and investment plan offered to federal employees and members of the uniformed services. It allows individuals to contribute a portion of their income towards retirement, and offers tax advantages to help grow their savings.
The Traditional TSP allows for tax-deferred contributions, meaning you don’t have to pay taxes on the amount you contribute in the year it is earned. Instead, taxes are deferred until you withdraw the money during retirement. This can be advantageous if you expect your tax rate to be lower in retirement compared to your current tax rate.
On the other hand, ROTH TSP contributions are made with after-tax dollars. This means you are taxed on the money you earn before contributing to your retirement account, but the withdrawals during retirement are tax-free. The main advantage of a ROTH TSP is that it allows your investments to grow tax-free, providing potentially greater savings in the long term.
Choosing between the two plans ultimately depends on your individual circumstances. Here are some factors to consider when making your decision:
1. Current and Future Tax Brackets: If you are in a higher tax bracket now and expect your tax rate to be lower during retirement, the Traditional TSP may be more advantageous. Conversely, if you believe your tax rate will increase in the future, the ROTH TSP may be a better option.
2. Flexibility: The Traditional TSP has required minimum distributions (RMDs) once you reach age 72. This means you must withdraw a certain amount each year, regardless of whether you need the funds or not. With the ROTH TSP, there are no RMDs, providing you with more flexibility in managing your retirement income.
3. Estate Planning: If leaving a tax-free inheritance for your heirs is important to you, a ROTH TSP may be beneficial. Traditional TSP withdrawals are subject to income tax, whereas ROTH TSP withdrawals are tax-free for designated beneficiaries.
4. Contribution Limits: Both the Traditional TSP and ROTH TSP have the same contribution limits, currently set at $19,500 for individuals under 50 years old. If you’re aiming to maximize your contributions, the plan that suits your tax situation best could be the deciding factor.
Ultimately, the choice between ROTH TSP and Traditional TSP depends on your unique circumstances and goals. Consulting with a financial advisor can help you understand the potential impact of each option on your retirement savings.
It’s also important to note that you are not limited to just one type of TSP. You can contribute to both the Traditional and ROTH TSP simultaneously, allowing you to diversify your tax liabilities in retirement.
In conclusion, deciding between ROTH TSP and Traditional TSP requires careful consideration of your current and future tax situations, flexibility needs in retirement, estate planning goals, and contribution limits. By assessing these factors, you can make an informed decision that aligns with your financial objectives, ultimately maximizing your retirement savings.
Thanks for watching everyone! If you found this video useful, then consider giving this video a LIKE! It really does help out my channel. Also check out my entire playlist of videos on the TSP: https://www.youtube.com/playlist?list=PLscTZuOqKWIxcH7ZW9STwVqQOY1xUKZgO
Great video
What about the 5% match that would also be added to your traditional and help it compound even more.
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.
What if I did regular tsp and roth IRA? How would that compare to roth TSP and regular brokerage combo?
Great video but there's one major flaw. Bart when he retires is not going to withdraw all the money at once most likely he will withdraw it as an income and be in the same exact tax bracket as Lisa. The difference between Roth and traditional is all about what your taxes are going to be in retirement. If if you assume the same effective tax rate for both Roth and traditional retirement the math is exactly the same. You will have the exact same amount of money whether you did traditional or Roth
Would the fact that Lisa’s, 5 percent match is going to traditional.. change her take home, taxes? As if she wants that, it’s going to be paid taxes to withdraw? This is the most helpful video I’ve found so far… but still not sure haha.
Hello sir,
Thanks for your video
If I make 60 k that will put me in 22 percent tax bracket at that point Traditional TSp is better also what if I live in a tax free state? Is it a better idea do a TSP traditional and open a fidelity Roth ?
Isn’t the biggest reason to go with the traditional first and the ROTH second the matching contribution? If you’re getting a dollar for dollar match, or even a .50 match, you aren’t going to get a 100% or 50% return in the market, and you get compound interest on the total amount, not just on what you contribute, no? It seems to me that the best strategy is to combine both. Plus if you’re close to being bumped up to the next tax bracket, the traditional could make more sense, no?
Great video thank you
For paycheck money you send to Roth tsp, is there a default fund within the Roth TSP it uses? How do I see/choose my funds within my Roth tsp
After taxes will your take home check be more if you did Roth or traditional if you did the same amount either or?
Can Federal employees invest in the stocks?
Great video!
What is the max I can put in my Roth TSP, 19500K?
Could you make another video in which they take out only say 50 thousand a year? That would drastically lower the taxes Bart would have to pay
If you put 5 percent Roth and 5 percent traditional will you get matched 5 percent on both or just one?
Great Video, very helpful!
Ok, You really got me there. Amazing video. Didn't realize what I was learning til I realized what I was learning lol!
You need to be more clear about your (very specific) assumptions. Most retirees have an annual income (Social Security + annual withdrawals from the TSP + pension + other income) that is less than their peak pre-retirement salary. So odds are that they will be in a lower tax bracket in retirement when compared to their peak earning years. So those people should be investing in Traditional, not Roth. The Roth is better for the few retirees who expect to have a higher income in retirement then in their peak working years, and the few who plan on a one-time withdrawal of all TSP funds. Another factor to consider is state & city income taxes. Federal employees who live or work in NYC and earn between $80,651 and $215,400 pay a combined state & city income tax rate of 10% on income in that bracket. Only the first $10,000 of those state & city income taxes qualify for the Federal income tax SALT deduction. If in retirement these people will have a lower income, or if they move to one of the states that does not tax retiree 401(k) withdrawals, it further changes the calculations in favor of Traditional. Another factor to consider is whether the difference in income taxes between Traditional and Roth is invested in a Roth IRA during the working years.
Awesome video! Very Informative. Thanks!!!
700th Like! Thank you, sir.
Great video, Thank you.
I wish the military taught us more about this. They just say pick something and let the next person log in and pick smh
Great video Jake–really clarifies things!
Thanks
You are really great @ explaining this. I think the reason ppl chose traditional or life cycles is from being uneducated in financial matters. High school and even college in most instances do not teach ppl to be financially savvy.
Roth all the, look at the Biden tax plan
Could you make a video explaining the 72t rule? If you retire early using Roth, do you have to pay tax again ? Seems like the 72t rule for traditional tsp keeps the penalty away. So being paid under the 72t rule while having a traditional tsp could be an option for some . I’m not familiar with the 72t rule and how it works exactly. People who dislike the Roth always mention the 72t rule for early retirement.
So a Roth TSP is essentially the same as a Roth IRA? They’re both savings accounts? From the information that I gathered from your Roth vs traditional IRA video, you can make 1.2 million through Roth IRA by maxing it out. If you invest like Lisa did in this video, it would be another 1.2 million ?