Most Americans with an employer-sponsored retirement plan are making “traditional” contributions to the account. If they want to open and fund a Roth account, they often take this action on their own. But as a federal employee, you have the option of choosing whether you want to make traditional or Roth contributions to your Thrift Savings Plan (TSP). Depending upon your preferences, you can choose one or the other, or make both types of contributions.
Traditional contributions are those that you make on a pre-tax basis. The money will come straight from your paychecks, before any taxes are deducted, and will be deposited into your TSP. Going this route will reduce your overall taxable income for the year, and therefore can lower your federal income tax burden.
These contributions will accumulate in your account with taxes deferred, meaning you won’t owe taxes on the earnings until you take withdrawals after retirement. If you’re a member of the armed forces and you contribute tax-free combat pay to your TSP, you will only owe taxes on the interest earned by that money.
The other option is to make Roth contributions. After taxes are deducted from your income, you can deposit money into your TSP. Now that money will never be subject to taxes again. Withdrawals in retirement will be free of taxes, and if you meet IRS rules for qualified earnings you won’t owe taxes on accumulated interest either.
Deciding between traditional or Roth contributions can be a complicated dilemma. Some people wish to establish tax-free income in retirement, and therefore opt for Roth contributions. Others feel that they benefit more from making pre-tax contributions now, and saving money on income taxes throughout their careers. Often the decision comes down to your expected tax bracket in retirement: Do you expect to move up a bracket, will your annual income stay about the same, or will you be earning less? This could be the deciding factor.
Since this is a complicated issue and there is no one-size-fits-all answer that works for all federal employees, you should discuss the decision carefully with a financial advisor. Give us a call, and we will offer our federal retirement expertise to help you make the decision that is right for you.
