Roth TSP Investments: Making Your Retirement Dollars Work For You

Having an understandable retirement strategy can make saving for retirement easier and less stressful. As a service member, you may already be familiar with the tax advantages of the traditional Thrift Savings Plan. Now there's a new TSP tool that offers a different way to save for retirement: Roth TSP. To figure out whether the Roth TSP is a good fit for you, you need to know how it works, how it differs from a traditional TSP contribution and the potential benefits. Equipped with the right knowledge, you can be sure you are making the best decisions for your future retirement!

How the Roth TSP works

The TSP is a retirement savings plan for federal employees and members of the uniformed services similar to the 401(k) plans offered by many private employers. Traditionally, participants invest pre-tax dollars into their TSP accounts. With the Roth TSP, participants have the option to make Roth contributions, allowing participants to invest after-tax dollars into their TSP accounts.

Roth contributions are taken out of your paycheck after your income is taxed. Since you pay taxes on the money before you invest it, you receive the money tax-free when you withdraw funds. You also won't have to pay taxes on any earnings, as long as you're at least 59.5 years of age, disabled, or deceased (in which case your beneficiary will not have to pay taxes on earnings), and your withdrawal is made at least five years after the beginning of the year in which you made your first Roth contribution.

Simply put, the Roth TSP option is just one more way for you to customize your retirement plan. You can continue to invest in TSP with your pre-tax dollars, but now you also have the additional option of making after-tax investments. You can elect to make Roth TSP contributions in the same way you have always elected to make traditional contributions, using either the electronic system of your agency or service, or by filling out the proper TSP forms.

How the Roth TSP differs from the traditional TSP

Before you decide on the best investment strategy for you, you really need to understand what makes these two investment options different:

  • Contributions - When you contribute to your traditional TSP, the taxes are deferred until withdrawal, so less money is taken out of your paycheck. With Roth contributions, taxes are paid up-front, so more money comes out of your paycheck.
  • Withdrawals - When you withdraw funds from your traditional TSP, you will have to pay taxes on the money, as well as the earnings it has accrued. With Roth contributions, you have already paid taxes on the money, so you can withdraw it tax-free, along with any earnings it has accrued (as long as you meet the requirements noted above).
  • Tax Breaks - Traditional pre-tax contributions lower your current taxable income, so you get a tax break today. With Roth contributions, you pay the taxes up-front, so the full amount of your contribution comes out of your paycheck now, but you will not pay taxes on the money or earnings (as long as the rules are met) when it is withdrawn.

Electing to make Roth contributions is not an all-or-nothing decision. You can contribute to both your Roth and traditional TSP balances. Contribution limits for 2013 are $17,500 for the combined total of your Roth TSP and tax-deferred traditional contributions. If you are at least 55 years old, you can make "catch-up" contributions up to $5,500. If you are receiving Combat Zone Tax Exclusion benefits, the limit is $51,000. In addition, Roth and traditional TSP contributions do not prohibit you from contributing to a Roth or Tax Deductible IRA, if you are otherwise eligible.

Deciding what to do

Here are some considerations:

  • Your current tax rate - It all comes down to whether you would be better off paying your taxes now or later. As you make your decision, think about your current income level and tax rate and what you expect they might be when you retire. Here are some instances when the Roth TSP contributions might be a good option:
    • You are in a low income tax bracket now and think your tax rate could be higher in retirement. With the Roth TSP, your contributions are taxed at your current lower rate and you avoid paying taxes at a higher rate in the future.
    • Regardless of your current tax bracket, you believe your tax rate will increase in the coming years.
  • Your career path - If you are in the early years of your career and you expect your future income to increase considerably, paying the tax now on your TSP contributions might make sense. In addition, if you are a service member making contributions from tax-exempt combat pay, you will not pay taxes on either your Roth TSP contributions nor their earnings (as long as you satisfy the requirements mentioned in the first section of this article).

The new Roth TSP feature gives you the ability to select the tax treatment that best fits your individual needs. Active-duty military members who decide to make Roth TSP contributions can submit a contribution election, either electronically through MyPay or manually by submitting form TSP-U-1 to the local military finance office indicating what portion of their TSP contributions should be designated for a Roth IRA. Federal government employees should access their electronic pay system or manually complete form TSP-1. Reservists and National Guardsmen not on active duty will be able to contribute to a Roth TSP beginning in August 2013. This delay ensures that their financial pay systems will meet the requirements of the Federal Retirement and Thrift Investment Board.

To learn more about Roth TSP, visit the TSP website. There is an easy-to-follow introduction video and helpful newsletter with additional information. Be sure to seek the advice of a qualified tax or financial advisor for help deciding whether the Roth TSP is right for you. You can meet with a personal financial manager through your installation. For contact information visit MilitaryINSTALLATIONS and select "Personal Financial Management Services" in the "Looking for specific program or service" box. The more you learn about your retirement investment options now, the more prepared you will be when the day finally arrives!


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