As a federal employee, you are probably aware that your Thrift Savings Plan offers many of the same advantages as a 401(k) plan often offered by private sector employers. Contribution limits are established by the same rules each year, and your TSP offers investment options that are similar to those included within 401(k) and other retirement accounts.
But did you know that you also have a choice regarding the tax structure of your TSP? Specifically, you can elect to make Traditional contributions, or Roth contributions. Likewise, you can use that same choice to determine the tax treatment your withdrawals receive in retirement.
What’s the difference? You could view Traditional and Roth contributions as “opposites”. With Traditional contributions, you place pre-tax dollars into your TSP. This lowers your taxable income for the year, right now, and can translate into savings on your annual federal income taxes. Later, when you retire and begin to take withdrawals to provide retirement income, those withdrawals are taxed as regular income.
With Roth contributions, you make after-tax contributions to your TSP. Since that money has already been taxed, you won’t owe any additional taxes on withdrawals of that money once you retire.
But there’s something else you might not know. You don’t have to simply choose between one type of contribution or the other. You can actually make both Traditional and Roth contributions throughout your career. You can even designate a certain percentage of your regular contributions to one type, and the rest to another. That way, you can enjoy some of the benefits of each type of contribution.
How you structure your contributions will be an individual decision, and there’s no single solution that suits everyone. Most people weigh the need for income tax savings now, versus the expected need for untaxed income in retirement. Often, your situation will change throughout your career, and your contribution structure should be adjusted to match your needs.
Give us a call to discuss this issue in more detail, and we can help you decide how to structure TSP contributions to your advantage.
