Should I Have a Traditional or Roth Thrift Savings Plan?
If you are a federal employee and planning for retirement, you must carefully consider whether to contribute to a Thrift Savings Plan (TSP) and what type of TSP you should get. This article will set forth the pros and cons and explain how an effective TSP strategy can best supplement your other retirement income sources.
What is a Thrift Savings Plan?
A Thrift Savings Plan (TSP) is a retirement and savings plan available to both civilian federal employees and members of the military. It is similar to the 401(k) plans offered by employers in the private sector.
Federal Agency Contributions
One aspect of TSPs that cannot be overlooked is that a federal employee may be eligible for matching contributions from their agency. If you are a federal employee you must look into whether matching contributions are available and whether there is a limit.
Once you have that information, plan on contributing at least the amount that will be matched. If you don’t, you are leaving free money on the table.
For many federal employees, their agency will contribute 1% of income to a TSP even if the employee contributes nothing. If the employee contributes 5% of income, the agency will contribute another 4%.
In a traditional TSP, your contribution is deducted from your pre-tax wages, and taxes are deferred until you make withdrawals. This reduces your present taxable income, and your contributions are taxed at the rate that applies to your income in retirement, which should be lower.
You make contributions to a Roth TSP with after-tax income. While this does not reduce your present taxable income, it does render your withdrawals in retirement tax-free.
What if I Worked in the Private Sector and have a 401(k) or Roth IRA?
You can roll an IRA from a private employer into your federal TSP. However, reach out to a Federal Retirement Consultant to ask about some other ways to manage these as well. Keep in mind also that if you are 50 or older you can make additional catch-up contributions, however, they will not be eligible for matching contributions from your agency.
Can I Convert a Roth TSP to a Traditional TSP?
No, and you can’t convert a Traditional TSP to a Roth or vice versa.
Which Type of TSP Should I Get?
Consider having one of each and varying the contributions according to how much money you are making. This allows you to strategically allocate retirement savings throughout your career to save the most in income tax.
For example, if you are just starting your career, you might open both a Roth TSP and a Traditional TSP, and contribute most to the Roth and just a bit to the Traditional. As the years pass and you presumably make more money, you can gradually increase contributions to the Traditional and decrease contributions to the Roth.
This way you are taking advantage of both the tax-free withdrawals of a Roth TSP, and the tax-deferred withdrawals of a Traditional TSP, and reducing your taxable income when you are making more, later in your career. Don’t forget to always contribute at least the amount that your agency will match.
What About Other Retirement Income?
You will have Social Security benefits when eligible, and if you are a civilian federal employee you will have an annuity from the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). If you are a member of the uniformed services, you will have Social Security benefits and your military retired pay.
The amount of income you have in retirement will vary according to the amount you contribute to your TSP, the amount that is taxable to you in retirement, and how you allocate your TSP contributions to the various funds and the return that your choices get. Even considering market variables, strategically contributing to your TSP is sure to maximize your income in retirement.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.