This is a pre-retirement issue when you are investing and accumulating retirement assets. But sometimes…it is better late than never.

Traditional TSP or Roth TSP?
A Roth account can often be a better investing option over the long term because you likely won't have to pay tax on the withdrawals in retirement when you can least afford to pay it. 

The most compelling reason to invest in a ROTH TSP:
TAX-Deferred‘ income could increase your spendable income in the future. Roth TSP makes sense for those who anticipate paying higher taxes in the future than they do today. 

Just so you know:

  • You cannot deduct contributions to a Roth TSP

  • Roth TSP has taxes are paid up front...more money comes out of your paycheck. Because it comes right out of your paycheck, a Roth contribution is likely to reduce take home pay by more than a similar contribution to the traditional option, which is made using pre-tax dollars.

  • If you want to save and take home as much money as possible...allocating to the traditional TSP option could be the way to go.

  • If you satisfy requirements, your contributions, dividends and or interest are received tax-free.

  • The requirements are that the account is open at least five years and you are either at least 59½ or permanently disabled. In the event of death, withdrawals by heirs are tax-free.

  • You can make contributions to your Roth TSP after you reach age 70 ½.

  • You can leave amounts in your Roth TSP as long as you live.

  • The account or annuity must be designated as a Roth TSP when it is set up.

  • The same combined contribution limit applies to all of your Roth and traditional TSP

How are Roth IRA Withdrawals Taxed?

  1. If you choose a Roth-style TSP, you will invest after-tax money now, but you won't pay taxes on withdrawals later in retirement.

  2. On the other hand...If you invest in a traditional TSP, you will invest pre-tax now but pay taxes later. Either way, your investment will work and grow tax-free.

Whether or not your withdrawal from a Roth IRA is taxed depends on four factors:

  1. The funds must have been in Roth IRA for at least five years before they can be withdrawn. 

  2. When the withdrawal was made.

  3. Whether the withdrawal was from contributions alone or if it included earnings.

  4. What purpose the withdrawal was made for.

Withdrawals made after age 59 and 1/2 are normal retirement withdrawals and are not taxed. You paid tax on that income when you first contributed to the Roth IRA.

If the withdrawal is made before age 59 and 1/2 and is only up to the amount that has been contributed to the Roth IRA then no income tax is charged. Withdrawals of contributions are tax-free.

On the other hand, if the withdrawal was made before age 59 and 1/2 and includes amounts above what you contributed (your investment earnings) then you may have to pay tax.

There are certain situations where the IRS will allow you to withdraw without penalty. Funds can be withdrawn for higher education expenses or to buy a home. Certain hardship circumstances such as permanent disability also allow funds to be withdrawn tax and penalty free.

Roth TSP and Required Minimum Distributions (RMDs)
The year after you turn age 70½, the IRS requires you to begin receiving a minimum amount of money from your account (unless you are still working). This is your RMD, and it is calculated based on your account balance and IRS life expectancy tables. IRS requirements for RMDs apply to employer-sponsored retirement plans like the TSP with no exceptions; therefore, RMDs will apply to Roth money in your TSP account, even though they do not apply to Roth IRAs.