Should You Choose a Roth TSP?

Should You Choose a Roth TSP?

As a federal employee, you have the option to set aside money for retirement via your Thrift Savings Plan (TSP). That’s on top of your annuity plus Social Security benefits, meaning you have quite a bit of power to establish a healthy retirement income for yourself! So, deciding to utilize your TSP is probably not a difficult decision… But deciding which type of TSP could present a dilemma.

With a traditional retirement account, including the TSP, taxes are deferred until distributions begin in retirement. All money that you set aside now is free of taxes – essentially reducing your taxable income for each year that you contribute to the fund – but will be taxed as regular income when you begin taking distributions someday.

With a Roth account, you make after-tax contributions. It doesn’t help you with your income taxes at all right now, but all distributions from the account will be free of taxation once you retire. For some people, the allure of tax-free income in the future can be a major selling point for the Roth option.

At this point, you might realize the main deciding factor for most people: If they believe they will fall into a higher tax bracket in retirement, they often choose to fund a Roth account now. On the other hand, if they believe they will drop down by one tax bracket (or more), they often stick with a traditional TSP.

That’s an important consideration, but here is another piece of the puzzle. How much do you need to lower your income tax burden now? What if, by saving money on federal income taxes each year, you would actually be able to save more for retirement? That’s a difficult opportunity to pass up, too!

As you can see, choosing between a traditional or Roth TSP can be a difficult decision for many people. There are several factors to weigh carefully, along with attempting to predict the future.

Since this is an important decision that could make a significant different to both your current and future tax status, give us a call to discuss the issue further. We can help you calculate your approximate retirement income, compare the two tax scenarios, and come to a decision that works for your unique situation.