What Factors Should I Consider Before Contributing to a Roth TSP?

Before considering anything, it is important to know what a Roth TSP is. A Roth TSP, or Thrift Savings Plan, is a tax-deferred retirement savings and investment plan specifically for federal employees and members of the uniformed services. A Thrift Savings Plan is similar to a 401(k) plan, which is a retirement savings plan offered by employers of private-sector corporations. Those who take part in utilizing a TSP can save for retirement, as well as potentially receiving matching contributions made by their employer and receive reductions on their current income taxes.

Determining if a Roth TSP is right for you is a daunting task, and there are several factors to take into account when making this decision. Typically, Roth TSPs are a good match for individuals who anticipate their tax rate to be higher once they are in retirement than it is now. However, when you make contributions to your Roth TSP, there will be no reduction in your adjusted gross income like there is when you choose the traditional route. This is one of the key factors to think about when making the decision of which type of plan to choose.

Another factor to consider when deciding if a Roth TSP is right for you is the fact that your take-home pay will be reduced by more than it would if you choose the traditional option. Traditional 401(k) plans are created using pre-tax dollars and allow you to take home as much money as possible (not including taxes), whereas Roth contributions do not. Traditional TSPs will enable you to make contributions before taxes are taken out of your paycheck, which you then pay taxes on future withdrawals. Roth TSP contributions mean that taxes are paid up front, and your contributions are made with after-tax income.  You may contribute up to $19,000 to your Roth TSP for 2019 ($19,500 in 2020) and if you are over age 50 you may also make an additional $6,000 catch-up contribution ($6,500 in 2020).  This is considerably more than you may be able to contribute to a Roth IRA, which is $6,000 plus a $1,000 catch-up contribution if you are over age 50.  That said, if you want to contribute to a Roth IRA outside of your TSP and your income is over $206,000 (married filing jointly) or over $139,000 (filing single) you may not be eligible to contribute directly to a Roth IRA.  If your income is below these limits we recommend speaking to a CPA or financial advisor to determine if you are eligible for a full or partial contribution.

Roth TSP withdrawals do not require you to pay state or federal income taxes, which means if you have a higher tax bracket in retirement, the stronger your Roth account will be in the long run. Roth TSPs are great for those who are good savers because they are more likely to benefit from the tax-free withdrawals that come with choosing a Roth account.  Furthermore, Roth TSP’s are not subject to required minimum distributions (RMD’s).  This gives the account owner the added flexibility to only take withdrawals on cash flow needed as opposed to a mandated withdrawal percentage set by the IRS.  Given that many federal government retirees have a taxable pension and social security, the Roth TSP is an option to have a tax-free resource for later in retirement.  For additional information on required minimum distributions you may visit the IRS’s website: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions      

As more and more employers offer their employees a choice between traditional or Roth retirement savings accounts, it is important to take these factors into account when determining if a Roth TSP is a good fit for you. It is important to think about what your tax rate is now, and what you think it will be in the future in order to properly decide if a Roth TSP or traditional TSP is right for you.

When making decisions like this, it may be helpful to speak with a financial advisor to make sure you understand all your options. Plotkin Financial Advisors is here to help you understand the options available to you, especially when it comes to making decisions for your financial future. Contact us to learn how we can serve you today!

Securities offered through Independent Financial Group, LLC (IFG) a registered broker dealer and Member FINRA/SIPC. Advisory services offered through Plotkin Financial Advisors, LLC, a registered investment adviser. Plotkin Financial Advisors, LLC and IFG are unaffiliated entities.

References:

https://www.tsp.gov/PDF/formspubs/tspbk08.pdf

https://www.myfederalretirement.com/thrift-savings-plan/

https://www.tsp.gov/PlanningTools/InvestmentStrategy/retirementsavings/taxAdvantages.html