Evaluating the Pros and Cons of Roth TSP versus Traditional TSP

Chris Reddick |

A weighty decision for both uniform and civilian members is whether you should do Roth or Traditional Thrift Savings Plan (TSP). This blog post discusses how to evaluate that critical decision. I will also give you some resources to do further research. It is essential to have a strategy now as it could save you on taxes in your retirement.

One of the most important considerations is whether to do a Roth TSP or a traditional TSP. It would help if you thought about where you will be in the future. If you believe that you will be in a higher tax bracket in the future, then a Roth TSP might be the best option. You need to know your current tax rate and determine whether it will increase in the future. You don't have a crystal ball, but you can look at where you are in your current uniform or civilian career as a starting point.

For instance, a Roth TSP might not make sense if you are approaching retirement and in a higher tax bracket. By contrast, someone early in their military career or civil service might be in a lower tax bracket, and a Roth TSP might be most advantageous. Or, if you want to have the money in retirement come out tax-free, the Roth TSP might be the best option. But if you want to save on taxes now, the traditional TSP will offer this benefit by reducing your current income from the TSP contribution.

Remember, with a Roth TSP, you need to be age 59.5 and have contributed your first contribution to the Roth TSP five years ago to take the money out tax-free. If these two requirements are met, the principal and earnings will be tax-free, a significant benefit.

Essentially, you need to understand three items.

1. Do you understand your current tax rate? You can talk to a financial planner to figure this out. Or you can refer to the marginal tax rate charts that the IRS updates each year.
2. You should calculate the difference in savings with the TSP contribution decision wizard. Also, use these handy resources on the TSP website.
3. Develop your TSP strategy: Roth or traditional or both. You don't need to do one or the other. You can do a combination of both. It is nice to have the money in different buckets with some tax-deferred (traditional) and tax-free (Roth).

Keep in mind that you cannot convert to Roth TSP from traditional and cannot transfer Roth IRAs to your Roth TSP. Not being able to do a rollover is one of the significant drawbacks of a Roth TSP if you already have a Roth IRA. Also, your portion of TSP contributions can go into the Roth TSP, but all matching contributions from the government are put in the traditional TSP and are taxable in retirement.

Talk to a financial planner for guidance on whether a Roth or Traditional TSP suits your circumstances. As I mentioned in other blog posts, the TSP is one of the best retirement plans, low cost, and easy to manage, and you should take advantage of this to save for a comfortable retirement.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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