The Thrift Savings Plan (TSP) is a retirement savings and investment plan for U.S. service members and federal employees. It offers two main types of accounts: Traditional and Roth.
Traditional TSP
With a Traditional TSP account, you contribute pre-tax dollars, which reduces your current taxable income. This means you’ll pay taxes on your contributions and earnings when you withdraw the money in retirement.
Roth TSP
With a Roth TSP account, you contribute after-tax dollars, which means you pay taxes on your contributions now. However, your earnings and withdrawals are tax-free in retirement.
Who Should Use a Roth TSP?
Generally, a Roth TSP is a better choice if you expect to be in a higher tax bracket in retirement than you are now. This is because you’ll pay taxes on your contributions now at a lower rate, and then you’ll be able to withdraw your earnings and contributions tax-free in retirement.
Here are some factors to consider when deciding if a Roth TSP is right for you:
- Your current tax bracket: If you’re in a low tax bracket now, you may want to consider a Roth TSP so you can pay taxes on your contributions at a lower rate.
- Your expected tax bracket in retirement: If you expect to be in a higher tax bracket in retirement, a Roth TSP can help you save on taxes.
- Your investment horizon: Roth TSPs are best for long-term investments, as you’ll need to hold the money in the account for at least five years to avoid paying taxes and penalties on your withdrawals.
Who Should Use a Traditional TSP?
A Traditional TSP is a better choice if you expect to be in a lower tax bracket in retirement than you are now. This is because you’ll pay taxes on your contributions now at a higher rate, but you’ll be able to withdraw your earnings and contributions tax-free in retirement.
Here are some factors to consider when deciding if a Traditional TSP is right for you:
- Your current tax bracket: If you’re in a high tax bracket now, you may want to consider a Traditional TSP so you can reduce your current taxable income.
- Your expected tax bracket in retirement: If you expect to be in a lower tax bracket in retirement, a Traditional TSP can help you save on taxes.
- Your investment horizon: Traditional TSPs are best for long-term investments, as you’ll need to hold the money in the account for at least five years to avoid paying taxes and penalties on your withdrawals.
Additional Considerations
In addition to the factors discussed above, there are a few other things to keep in mind when deciding between a Roth TSP and a Traditional TSP:
- Contribution limits: The contribution limits for Roth TSPs and Traditional TSPs are the same. For 2023, the elective deferral limit is $22,500, and the catch-up contribution limit for participants age 50 or older is $7,500.
- Investment options: Both Roth TSPs and Traditional TSPs offer a variety of investment options, including stocks, bonds, and mutual funds.
- Withdrawals: Withdrawals from Roth TSPs and Traditional TSPs are taxed differently. Withdrawals from Roth TSPs are tax-free, while withdrawals from Traditional TSPs are taxed as ordinary income.
The decision of whether to use a Roth TSP or a Traditional TSP depends on your individual circumstances and financial goals. Consider the factors discussed above to make the best decision for your situation.
5 Reasons to AVOID the Roth TSP (and Roth Conversions)
FAQ
Is it better to have a Roth TSP or traditional TSP?
What are the disadvantages of Roth TSP?
Should I convert my TSP to a Roth TSP?
What percentage should I put in my Roth TSP?
What is a Roth TSP & Roth IRA?
For those employees who in the past were able to contribute to deductible traditional IRAs and who have been throughout their federal careers contributing to the traditional TSP, the Roth TSP and Roth IRA are a mirror image of the traditional TSP and the deductible traditional IRA, respectively.
Should I choose a Roth or traditional TSP?
Your decision about Roth and traditional TSP is a choice of when you pay income tax on your TSP contributions and earnings. You can pay taxes either when you earn and contribute the money or when you take it out.
Can federal employees contribute to a Roth TSP vs a traditional TSP?
This column discusses some considerations for federal employees in choosing to contribute to the Roth TSP vs. the traditional TSP. Employees should note that they can contribute to both the traditional and the Roth TSP provided their total contributions to both do not exceed the IRS’ elective deferral limit.
Who will benefit most from the Roth TSP?
Those employees who expect to be in a higher marginal tax bracket during retirement compared to their present marginal bracket will benefit most from the Roth TSP. Here is a list of other factors that employees should consider when choosing to contribute to the traditional or the Roth TSP: