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LEARN MORE ABOUT: Thrift Savings Plans

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When it comes to withdrawing funds from your Thrift Savings Plan (TSP) in retirement, one of the key decisions you’ll need to make is whether to withdraw from your Traditional TSP or your Roth TSP first. Both types of TSP accounts have their own unique advantages and disadvantages, so it’s important to carefully consider your circumstances and financial goals before making a decision.

Traditional TSP accounts are tax-deferred, meaning that you contribute money to the account before paying taxes on it. This can provide a tax break in the years that you contribute to the account, as your contributions reduce your taxable income. However, when you withdraw money from a Traditional TSP account in retirement, you will owe taxes on the withdrawals at your regular income tax rate.

On the other hand, Roth TSP accounts are funded with after-tax dollars, meaning that you pay taxes on the money you contribute to the account upfront. While Roth TSP contributions do not provide an immediate tax break, the withdrawals from a Roth TSP account in retirement are tax-free, as long as certain conditions are met.

So, which account should you tap into first in retirement? The answer will depend on your individual financial situation and goals. Here are a few factors to consider when deciding whether to withdraw from your Traditional TSP or Roth TSP first:

1. Tax rates: If you expect to be in a lower tax bracket in retirement than you are currently, it may be beneficial to withdraw from your Traditional TSP first, as you will pay less in taxes on the withdrawals.

2. Future tax rates: On the other hand, if you anticipate being in a higher tax bracket in retirement, withdrawing from your Roth TSP first may make more sense, as you will be able to take advantage of tax-free withdrawals.

3. Diversification: Some financial advisors recommend a strategy of withdrawing from both Traditional and Roth TSP accounts in retirement to diversify your tax liabilities. This can help to minimize the impact of changing tax rates and ensure that you have a mix of taxable and tax-free income in retirement.

4. Other sources of income: Consider your other sources of retirement income, such as Social Security benefits, pensions, or investment accounts. Depending on your overall financial picture, withdrawing from your Traditional or Roth TSP first may be more advantageous.

Ultimately, the best approach for withdrawing funds from your TSP accounts in retirement will depend on your unique financial situation and goals. It’s important to consult with a financial advisor or tax professional to help you make the best decision for your individual circumstances. By carefully considering your options and weighing the pros and cons of each account, you can make an informed decision that maximizes your retirement savings and minimizes your tax liabilities.