Federal Employees Can Choose How to Save for Retirement

Jun 1, 2015 | Miscellaneous

When you’re saving for retirement, one of the main things you need to consider is how your contributions are treated by the IRS. Unlike many workers, federal employees have the advantage of choosing how to make contributions to their Thrift Savings Plan (TSP). You can choose one or both of these options, depending upon your individual situation.

  • Traditional, pre-tax contributions
  • Roth, after-tax contributions

If you choose to go the traditional route, you will make contributions to your TSP out of your paycheck, before taxes are paid. Your overall taxable income will be lowered, so that you owe less to the IRS during tax season each year.

Traditional contributions to your retirement fund grow with taxes deferred. This means you won’t owe taxes on the money, or its earnings, until you take withdrawals in retirement. Members of the armed forces who contribute tax-free combat pay to their retirement plans will only owe taxes on the interest that money earns.

If you choose to make Roth (after-tax) contributions, you deposit money into your TSP after paying taxes. This money will never be taxed again. As long as you meet IRS rules for qualified earnings, the interest on those funds will not be taxed either.

When deciding whether to make traditional or Roth contributions, think about your tax bracket now versus your tax bracket in retirement. If you expect your income to be higher in the future, it might make sense to make Roth contributions now. On the other hand, those of you in your peak earnings years might be better off making traditional contributions. Of course, everyone’s situation is different. That’s why you should discuss this issue with your financial planner, and continue to adjust your retirement plan as your financial situation changes.

14566 – 2015/6/5

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