Roth TSP vs Traditional TSP
In May of 2012, The Federal Government offered its government employees a new form of retirement plan known as the Thrift Savings Plan (TSP) Roth, commonly known as the Roth TSP. This is quite different from the traditional “tax deferred TSP” that has been offered in the past. Both TSPs have their pluses and minuses.
The traditional “tax deferred” TSP is a retirement plan that simply means the money you contribute into your TSP retirement account today doesn’t get taxed when it goes in, so you reap the tax benefit of not getting all of your money taxed now. For people in higher tax brackets this could be a plus since this money isn’t taxed right away. However, once you retire, the money you have put in will be taxed at whatever the tax rate is at the time you start taking your money out (called “distributions”).
The Roth TSP is a retirement plan that means the money you contribute into your TSP retirement account today gets taxed right now. For people who are worried about being on a fixed income when they retire and don’t want to have their fixed income taxed in the future this is a plus. Also, another HUGE plus of the Roth TSP is that with traditional TSPs ALL of the money that you withdraw will be taxed when you retire and take the money out (this includes government matching contributions + your contributions + any earnings the account has made). With a Roth TSP only the original contributions put in will be taxed when the money goes into the account. NONE of the money will be taxed when it is taken out. This means that you will get ALL of the earnings on the retirement account TAX FREE when you retire.
All that basically means is that you can decide if your money gets taxed when the money goes into your TSP account, or if your money gets taxed when you retire and the money is coming out of your TSP retirement fund.
Here’s a chart I got from the TSP website that summarizes the differences between the two:
|The Treatment of…||
|Your Paycheck||Taxes are deferred, so less money is taken out of your paycheck.||Taxes are paid up front, so more money comes out of your paycheck.|
|Transfers In||Transfers allowed from eligible employer plans and traditional IRAs||Transfers allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s|
|Transfers Out||Transfers allowed to eligible employer plans, traditional IRAs, and Roth IRAs2||Transfers allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs3|
|Withdrawals||Taxable when withdrawn||Tax-free earnings if five years have passed since January 1 of the year you made your first Roth contribution, AND you are age 59½ or older, permanently disabled, or deceased|
1 Roth contributions are subject to Federal (and, where applicable, state and local) income taxes, while traditional contributions are not taxed until withdrawn. However, both Roth contributions and traditional contributions are included in the amount of wages used to calculate payroll taxes (e.g., Social Security taxes).
2 You would have to pay taxes on any pre-tax amount transferred to a Roth IRA.
3 Transfers to a Roth IRA from a Roth TSP are not subject to the income restrictions that apply to Roth IRA contributions.
Now that the Federal Government is offering this new TSP Roth retirement plan option to its employees, many are asking the question: “How do I know which TSP plan is best for me?”
The simple answer is it depends on which plan you believe will give you the most tax benefit. If you think that you will pay more taxes today than in the future, then the traditional tax deferred TSP may be right for you. If however, you think you will pay more taxes in the future (the government raises income taxes on the American public in the future for example, or you think you will be in a higher tax bracket), then the Roth TSP may be the way you want to go.
As a side note, I should mention that you don’t have to put all of your retirement savings into either a TSP or a Roth. You can have any percentage combination you want put into both of the plans at the same time if you like (ex. 40% going into the Roth TSP and %60 going into the traditional TSP)
Determining if a Roth TSP or a traditional TSP is best for you’ll need to consider several factors like your age, current income, and your current tax circumstances. It’s a good idea to talk to your agency’s human resources department, an accountant, or financial planner for more information.
Here are some links I found useful that may give a more in-depth explanation of the retirement plans.