Thrift Savings Plan: Roth TSP or Not?
In 2012, the Roth TSP became available to federal government employees for the first time. Non-government workers had been given the opportunity to participate in the Roth 401(k) and Roth 403(b) plans six (6) years earlier, in 2006.
Unlike contributions to the original TSP, contributions to the Roth TSP are after-tax, meaning that Roth TSP contributions do not reduce your taxable income. With both the original TSP and the Roth TSP, any earnings, profits, or growth are not taxed while in the plan. Earnings, profits, or growth in the original TSP are tax-deferred, meaning you pay taxes on them at some point in the future. Earnings, profits, or growth in the Roth TSP are tax-FREE when the participant reaches age 59 ½ and the Roth account has been established for five (5) years.
At first glance, a federal employee may decide not to contribute in the Roth TSP because it doesn’t reduce their current taxable income. Current taxation is a significant consideration, but shouldn’t be the only consideration. A federal employee made conclude that (s)he may be in a lower tax bracket upon retirement, but that isn’t always the case. Let’s examine the marginal tax rates for select income ranges and filing statuses:
The next tax bracket below the 28% tax bracket is the 25% bracket – only a 3% drop. To be in a significantly lower tax bracket, a federal employee would have to have a substantial drop in income to go from the 28% tax bracket to the 15% tax bracket.
Conclusion: For most federal employees, and Americans in general, withdrawals from Roth accounts provide the only potential to receive income that is TAX-FREE in retirement. You will have to pay taxes on withdrawals from the original TSP at your marginal tax rate. The Roth TSP option is available to CSRS participants and FERS participants. The consideration should not be original TSP OR Roth TSP, but original TSP AND Roth TSP!
A Chartered Federal Employee Benefits ConsultantSM is a financial planning professional who has been specially trained on the complexities associated with the retirement and other benefits offered to the employees of the federal government. To learn more about whether taking out money from the TSP early is in your best interest, please contact Jones Wealth Management Group at 901-312-9166 and schedule a no-cost, phone or in-person consultation. Jones Wealth Management Group does not provide tax advice. Please consult your tax professional as it pertains to your situation. As always the final decision is always the client’s. This information should not be used as a basis for tax advice. In any specific case, the parties involved should seek the guidance and advice of their own tax counsel.