Traditional TSP vs. Roth TSP – What’s the Difference?
Federal government employees have options when selecting a retirement savings plan. Employers match part of their employees’ retirement savings through a traditional Thrift Savings Plan (TSP) or a Roth TSP.
What Is a Thrift Savings Plan (TSP)?
While many private employers offer their employees a 401(k)-retirement savings plan, the federal government created the Thrift Savings Plan (TSP) – a retirement savings plan for its employees and military personnel. A TSP allows employees to build retirement savings in an account by setting aside a percentage of their paychecks. The funds are then invested and grow until employees retire.
What Is a Roth TSP?
As part of the Federal Employees Retirement System (FERS), you are automatically enrolled if you are a federal employee or member of the military. And 0.8% of your base salary is deducted to pay for it in addition to paying in some post-tax dollars. After your retirement, however, no additional taxes should be owed and is tax-free when you withdraw it. Your government employer automatically matches at least 1% of your base pay contribution and can add a higher percentage if you match that contribution.
Traditional TSP & Roth TSP Rules
With a traditional TSP, the funds paid into an account come from pre-tax dollars. This means income taxes won’t be paid on it until you retire and withdraw funds. Then you will owe income taxes on both the principal and the interest your funds earned. With a Roth TSP, you’ll pay in post-tax dollars with owed taxes withheld on your income that year. At retirement, all proceeds are tax free. Whichever you choose, these rules apply:
- Your federal employer will contribute 1-5% to your account.
- You may contribute up to a maximum annual limit, which can be adjusted each year. The maximum for the 2021 tax year is $19,500, plus $6,500 if you’re age 50 or older.
- Your money will be invested in your choice of several investment funds as well as lifestyle cycle funds. Lifecycle funds gradually reduce the risk to your principal as you near retirement age.
Comparing Traditional TSPs & Roth TSPs
While you are discouraged from making early withdrawals from either, the rules are different for a traditional TSP vs. a Roth TSP:
- For a traditional TSP, you are not allowed to touch this money before age 55 (if you retire or separate) or by age 59 1/2 (whether or not you retire). Otherwise, you’ll pay a tax penalty. You will, however, owe income taxes on your money when you withdraw it.
- In a Roth TSP, you are allowed to take the principal in your account at any time. You cannot, however, touch any of the profits your money earned without paying a penalty.
- While traditional IRA accounts require you to take some money out every year when you reach age 72, there are no similar restrictions on a Roth account.
Federal Educators
At Federal Educators, we can help you better understand your federal retirement benefits. Give us a call and request your free analysis at 866-226-8160.
