The big difference between the Traditional Thrift Savings Plan (TSP) and the Roth TSP is really about when you want to pay taxes on withdrawals – now or later. With the Traditional TSP you can save on taxes during your working years by making pre-tax contributions then pay taxes later when you’re taking distributions in retirement.
With the Roth TSP, you make contributions after you’ve paid taxes on your wages and the distributions you take later are tax free in retirement. Deciding which one is better depends on your financial situation. Then again, a combination of both may be the best decision.
When The Traditional TSP May Be A Better Choice
The Traditional TSP can lower your adjusted gross income during your working years which may also help you qualify for some types of tax credits. Tax planning for retirement also comes into play when choosing the traditional TSP. If, after crunching the numbers, your projected retirement income puts you in a lower tax bracket when you separate from service, the Traditional TSP may be the way to go.
“Another advantage — as of January 1, 2024, Required Minimum Distributions (RMDs) are no longer required for Roth TSP balances.”
When The Roth TSP May Be A Better Choice
When you choose a Roth TSP, you’re paying taxes on your contributions at your current income tax rate and you won’t pay taxes in retirement when you withdraw your contributions and any qualified earnings. Earnings are considered qualified when two Internal Revenue Code (IRC) requirements are met:
- 5 years have passed since January 1 of the calendar year when you made your first Roth TSP contribution and
- You are at least age 59½, permanently disabled, or deceased.
Another advantage — as of January 1, 2024, Required Minimum Distributions (RMDs) are no longer required for Roth TSP balances.
The Advantages Of Having Both The Traditional TSP & Roth TSP
Having both types of TSP accounts may be the best tax strategy for your financial situation. If there are years during retirement when you need to minimize taxes on your income, this is when you would withdraw from your Roth. During years when income taxes are lower, taxable distributions from your traditional TSP distributions may make more sense.
Having a Roth TSP balance is an advantage in the event of an emergency. If you make a sizable withdrawal from your Roth it’s tax-free. If your only option in an emergency is your Traditional TSP, you’ll owe taxes on the distribution.
To develop the best TSP strategy for your needs, consider working with an FRC® trained advisor who fully understands your federal benefits.
