“Should I put my TSP contributions in the traditional or Roth IRA?”
What? That sentence makes no sense.
Yet I have seen similar combinations on so many employee message boards.
Many federal employees know that there’s a Roth option for the TSP but seem to get it mixed up with a Roth IRA.
While there are similarities between a Roth IRA and a Roth TSP, there are also some major differences!
If you’re confused about the Roth TSP, this article will set you straight.Get Gov Worker’s top 4 tips for federal employees!
Table of Contents
- Overview of the Thrift Savings Plan (TSP)
- The Roth TSP is not a Roth IRA
- Differences between a Roth IRA and the Roth TSP
- Advantages of Roth accounts
- Why you may wish to roll-over your Roth TSP to a Roth IRA
- Summary- the Roth TSP is similar to a Roth IRA with key differences
Please do not confuse my personal blog for financial advice, tax advice or an official position of the U.S. Government. This post may contain affiliate links. If you make a purchase after clicking on a link, I get a small percentage of the sale at no additional cost to you.
Overview of the Thrift Savings Plan (TSP)
Federal employees can participate in the the Thrift Savings Plan (TSP) as one of the retirement benefits of working for the federal government. In many ways, the TSP functions similarly to a private sector 401(k).
Civilian employees under FERS receive agency matching contributions on the first 5% of their salary they contribute. Employees can max out their TSP by reaching the annual contribution limit of $20,500 (in 2022). Employees over the age of 50 can make an additional $6,500 of catch-up contributions.
Unlike a 401(k), TSP accounts can only invest in one of 5 individual funds:
- The C Fund, comprised of stocks within the S&P 500
- The S Fund, which contains small and medium cap stocks
- The I Fund, which holds international stocks
- The F Fund, which holds corporate and government securities
- The G Fund, which holds short-term U.S. Treasury securities and is guaranteed not to lose value
How to enroll in the Thrift Savings Plan
As of October 1, 2020, new employees make automatic contributions equally to 5% of their salary and are automatically receiving the maximum amount of the match they are eligible for through agency contributions.
New employees are automatically enrolled in lifecycle funds with an appropriate target date. (If you are looking for your own age appropriate lifecycle fund, here is how the government sorts out the age brackets).
Note, automatic enrollment is made in a traditional TSP and not a Roth TSP.
If you began before 2020 and want to enroll in the TSP, you will need to check with your agency human resources department. Depending on which agency you work for, you can change your TSP contribution amount in an automated system such as My Pay, the NFC Personal Page, Employee Express, or the GRB platform.
How to contribute to the TSP
You can only contribute to the TSP through payroll deduction. After logging onto your HR system, you can change your contribution elections to a dollar amount you’d like deducted from your paycheck.
Once logged on, you can decide how to split your contribution among your tax-deferred employee contributions (Traditional TSP) and tax-exempt contributions (Roth TSP). Note that the agency match is always a tax-deferred contribution.
You can also elect a “contribution percentage” to have a certain percentage of your pay contributed each pay period. Since the government matches the first 5% of your pay, if you only want to contribute to get the match, it is easiest to set your contribution percentage to 5% so that you don’t miss out on any extra money.
In my system (NFC Personal Page) you can change the employee contributions each pay period if you so chose. However, it is easier to make regular contributions throughout the year.
If you want to contribute the maximum amount to the TSP, it is easiest to base your contributions off of a fixed dollar amount. This will prevent you from making an erroneous contribution/excess contributions over the limit.
The Roth TSP is not a Roth IRA
If I had a dollar for every time someone confused the Roth TSP for a Roth IRA on a federal employee message board, I’d be super rich!
While I covered the differences between the TSP and an IRA in an earlier post, I think I need to be very explicit about it in this post.
Roth is an adjective, not a noun*
For retirement accounts, Roth is an adjective that describes how the contributions are taxed.
- Roth accounts are funded with after tax dollars. Money within a Roth account can grow without capital gains taxed. Withdrawals are tax exempt (tax free).
- Traditional accounts are funded with pre-tax dollars. This can lower your taxable income and place you in a lower tax bracket. Money in these accounts grows without capital gains tax. However, withdrawals are taxed.
Both the “Traditional” and “Roth” adjectives can get applied to various retirement accounts (nouns). Some types of retirement account nouns are:
- IRA (individual retirement account)
- 401(k) (defined contribution retirement plan)
- TSP (thrift savings plan)
- 403(b) (tax-sheltered annuity or TSA plan)
- 457(b) (deferred compensation plan)
I believe that some of this confusion between the Roth TSP and Roth IRA comes from the fact that in the beginning, the Roth adjective could only get applied to an IRA.
Since people were so familiar with “Roth IRA” I think people forget that Roth can get applied to any type of account.
*Technically, Roth is proper noun for Senator William Roth who championed the legislation for the tax-free retirement withdrawals.
Differences between a Roth IRA and the Roth TSP
You can contribute more money to a Roth TSP than a Roth IRA
You can contribute up to the annual limit of $20,500 (in 2022) per year to a Roth TSP. In contrast, at most, you can contribute only $6,000 to a Roth IRA.
I never understood why Congress established such generous rules for 401(k)s and TSPs compared to IRAs. Only a subset of the population has access to a 401(k)/TSP/etc, whereas every taxpayer can open an IRA.
Note: Since you can have both a Roth IRA and a Roth TSP, you can contribute up to $26,500 into accounts that will have tax-free withdrawals per year. (Even more if you are eligible for catch-up contributions).
Roth IRAs have income limits
Congress established income limits that prohibit high income earners from adding money to a Roth IRA. For example, if you are single and make more than $125,000 (modified AGI) you cannot contribute the full amount.
In contrast, all federal employees can contribute to the Roth TSP.
You need to take RMDs from the Roth TSP
One of the major advantages of a Roth IRA is that you never need to take anrequired minimum distribution (RMD). The government uses RMDs to make sure you eventually pay taxes on the traditional contributions that you got tax deductions on during your working years.
Since you already paid tax on money within a Roth account, the government does not require RMDs from a Roth IRA. (This has important tax consequences for inheritances/bequests).
However, the current TSP rules require RMDs from the Roth TSP. If you want to avoid the RMDs, you can rollover your Roth TSP balance to a Roth IRA after separating from federal service.
Advantages of Roth accounts
Withdrawals are tax free
Obviously, the biggest advantage over traditional TSP contributions is that you never have to pay tax on your Roth TSP balance ever again.
A Roth account will provide you with tax-free income in retirement. A major advantage of Roth withdrawals is that they do not count as provisional income in retirement. Therefore, Roth withdrawals will not affect taxes on your social security benefits.
You have more certainty in retirement planning
None of us have a crystal ball. There are lots of people who are certain that the only solution to the national debt is for Uncle Sam to raise future tax rates. (I am less certain of this.)
Whether a Roth or traditional TSP is better for you depends upon your current tax bracket, the amount you can contribute to your retirement savings plan, your expected tax bracket in retirement, and your life expectancy.
(Don’t believe me? Check out my math showing how in many cases it does not matter if you contribute to a traditional or Roth account if you can only contribute a fixed amount each pay period).
However, regardless of your situation, contributing to the Roth TSP ensures that you have “locked in” your tax rate. You know your withdrawals in retirement will be tax free and you can make a plan for your retirement dollars without having to think of taxes.
Side note- Roth conversion ladders
At this point, I want to point out that there’s a wonderful way to get the best of both worlds. If you plan to retire early, like I am, you can get the large tax deductions while you work and still get the tax benefits of a Roth when you’re ready to take qualified withdrawals.
The government allows you to roll over money from an traditional IRA or TSP into a Roth IRA. However, you pay income tax on the amount you convert. If you are not earning a salary, you are in a much lower tax bracket, and can convert a large portion of this money into a Roth account without paying any taxes (ever).
You can pass money to your heirs tax-free
I saved the best for last. The biggest advantage of a Roth TSP (and all Roth accounts) is that you can pass money to your heirs tax free through an inherited Roth IRA.
If you are listed as the beneficiary of a Roth IRA, you immediately inherit the money and it does not go through probate.
Furthermore, in most cases your heirs can withdraw money from the inherited Roth IRA without paying any taxes on the money, ever. (Note, you need to have opened the account five years prior to your death for the biggest benefits.)
The government requires that your heirs liquidate the inherited Roth IRA within 10 years of your death. Therefore, your heirs can only have tax-exempt growth for a decade before they need to withdrawal the funds.
Why you may wish to roll-over your Roth TSP to a Roth IRA
I love the TSP. I think the government set up the TSP so that civilian employees and uniformed services members can automatically build a healthy nest egg by the time they reach retirement age.
However, the rules regarding TSP withdrawal options are complicated and limit how you can manage your money in retirement.
There are two big reasons that you may wish to roll-over your Roth TSP in retirement:
- The Roth TSP requires RMDs. Taking RMDs out out of a Roth account limits the amount of tax-free growth you have on your money and prevents you from passing the tax advantages on to your heirs. This is a huge penalty that can be easily avoided by rolling your Roth TSP to a Roth IRA in retirement.
- While you can pass money tax-free to your heirs in your Roth TSP it is messy. Anyone who has worked for the government knows how many forms you need to fill out regarding pay/benefits/etc. Do you really want to have your spouse or children fill out this 9–page form and haggle with the government after you pass away?
While the TSP options are great for current employees, many employees would be best rolling their Roth TSP to a Roth IRA after they leave their federal agency for private employers or retirement.Get Gov Worker’s top 4 tips for federal employees!
Summary- the Roth TSP is similar to a Roth IRA with key differences
If you have decided that Roth is better for your individual tax situation, then the Roth TSP can help you put away more money in Roth accounts during your federal career.
However, you should understand how it differs from a Roth IRA and make sure that you manage your money appropriately for the maximum tax benefits.
Want to comment on this post? Leave me a message on my private Facebook group. Want more information about the TSP? Check out my TSP School.
SamSam i.e. "Gov Worker" started working for the government at age 18 and loved it so much that he never left. He started GovernmentWorkerFI in 2019 to help fellow federal employees understand their benefits, take control of their finances, and live their best lives.
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