Are you trying to save for retirement? If you are in the military, or you are a federal government employee, then you have probably heard of a TSP. Both TSPs and IRAs come in Roth versions. This means that the contributions are made with after-tax dollars and the withdrawals in retirement are tax-free. If you are trying to decide whether you should invest in a Roth TSP or a Roth IRA, we are going to cover them both in detail below.
What is a Roth TSP?
A Roth Thrift Savings Plan (TSP) is a workplace tax-advantaged retirement plan. It is available to military and federal government employees. It is sort of like the federal government’s version of 401(k) plans that most for-profit companies offer their employees. Your employer, yourself, or both of you can make regular contributions to the plan. It allows you to contribute after-tax income. While the contributions are not tax-deductible, all of your withdrawals during retirement will be tax-free.
What is a Roth IRA?
A Roth IRA is a type of tax-advantaged retirement account that you can open directly through a brokerage firm. The contributions are not tax-deductible but all future withdrawals are tax-free. You must have earned income during that year to contribute to a Roth IRA. You can only contribute up to the lesser of 100% of your annual income or the annual contribution limit. Your annual income must also be under a certain level to contribute. The exact amount that you can contribute will depend on your tax filing status and Modified Adjusted Gross Income (MAGI).
Is a Roth TSP the same as a Roth IRA?
A Roth TSP is similar to a Roth IRA but there are some differences. We are going to outline the similarities and differences below.
Similarities between a Roth TSP and a Roth IRA
– The money that you contribute to a Roth TSP and a Roth IRA has already been taxed. This means that it doesn’t reduce your taxable income. However, it also means that you will never pay taxes on these funds again.
– You must wait until 59 ½ to take withdrawals, otherwise, you will be subject to a 10% penalty.
Differences between a Roth TSP and a Roth IRA
- Plan type:
– A TSP is an employer-sponsored retirement plan and it is only available to federal government employees.
– An IRA is an individual account. This means that anyone with earned income can open and contribute to an IRA through a brokerage firm. - Contribution limits:
– The contribution limit for a Roth TSP for 2024 is $23,000. If you’re 50 or older, you can contribute an additional $7,500 for a total employee contribution limit of $30,500. If you are a federal government employee that began your service between August 1, 2010 and September 30, 2020 then you will automatically have 3% of your salary deferred into your TSP (pre-tax TSP, not Roth TSP). If you were hired after October 1, 2020, the automatic contribution amount is 5% of your salary (pre-tax TSP, not Roth TSP).
– The contribution limit for a Roth IRA for 2024 is $7,000. If you are 50 or older then you can contribute an additional $1,000 for a total contribution limit of $7,500. There are no automatic contributions. You will need to set up a transfer yourself to ensure that there are funds going into your Roth IRA. - Employer contributions:
– If you contribute to a Roth TSP then you will receive employer contributions. You will automatically receive 1% of your salary into your traditional (not Roth) TSP even if you don’t contribute to your TSP. In addition to the automatic 1% contribution, you will also receive a full/partial matching contribution of up to 5% of your pay. The total employer contributions will not go above 5%.
– There are no matching contributions for a Roth IRA. The only money that goes into a Roth IRA is the money that you contribute personally. - Investments:
– If you have a Roth TSP then you can choose from five different fund options. These are the G Fund, F Fund, C Fund, S, Fund, and I Fund. There is also the option for lifecycle funds. These are a diversified mix of the five individual funds. The fund will automatically adjust your risk the closer that you get to retirement options. Federal employees can now also invest in various mutual funds through the TSP mutual fund window.
– If you have a Roth IRA then there are many investment options available to you. These may include individual stocks and bonds, ETFs, mutual funds, and more. - Loans:
– If you have a Roth TSP then you can take out a personal loan and it can be spent on anything. This loan must be paid off within 5 years. There is also the option to borrow a residential loan, which must be used to build or buy a primary residence. This loan must be paid off within 15 years. These loans can only be made with your contributions and not your employer contributions.
– If you have a Roth IRA then you cannot take out a loan. - Withdrawals:
You can take out your Roth IRA contributions tax-free and penalty-free at any time. For a Roth TSP, you have to wait until 59½ before you can withdraw your contributions (and earnings) without penalty. - Required Minimum Distributions (RMDs):
-There are RMDs for Roth TSPs.The IRS requires that anyone who has a Roth TSP to start taking a distribution once they are 72 and are separated from federal service. One way to avoid RMDs is to transfer your Roth TSP money to a Roth IRA before age 72. However, the Secure Act 2.0 might eliminate RMDs from Roth TSP.
– There are no RMDs for Roth IRAs.
Roth IRA vs Roth TSP
| Plan Type | Employer sponsored | Owned by the individual |
| Eligibility | Federal employees and any military personnel | All taxpayers who meet income limits |
| Contribution Limits 2024 | $23,000 (plus employer contributions) | Up to $7,000 (an additional $1,000 if you’re age 50 or older). The contribution amount is based on your income and tax filing status |
| Employer Contributions | 1% automatic contributions plus matching contributions | No employer contributions |
| Investments | The investment options are selected by your employer | You can choose any type of investment except life insurance and collectibles |
| Loans | Available | Not allowed |
| Withdrawals | 10% penalty if before 59½ | Can take out contributions anytime without penalty |
| RMDs | Yes. However, the Secure Act 2.0 might eliminate RMDs from Roth TSP | No |
| Taxes | After-tax contributions; tax-free withdrawals in retirement | After-tax contributions; tax-free withdrawals in retirement |
Should I roll over my Roth TSP to a Roth IRA?
If you are near the age of 72, then it may make sense to roll your Roth TSP into a Roth IRA. However, before you roll over your funds to a Roth IRA, you should consider if the investment choices and fees fit your retirement goals. You may want to discuss this with your financial advisor first to decide if it’s the right option for you.
Is a Roth TSP or Roth IRA better?
There are benefits to investing in a Roth TSP or a Roth IRA. A Roth TSP has higher contribution limits, automatic contributions, and matching contributions. However, the investment options are limited and at the moment you have to take RMDs at age 72.
Roth IRAs have a great selection of investment options and they don’t have RMDs. However, they have lower contribution limits and income limits which means that not everyone can contribute. There are also no employer contributions. If you want to contribute to a Roth IRA, but your income is above the limit, then you could do a backdoor Roth IRA.
Should I invest in a Roth TSP or a Roth IRA first?
The decision about whether to invest in a Roth TSP or Roth IRA first will depend on your situation. Below are some general recommendations; but it’s best to consult your financial advisor so that you can make a decision based on your needs and the amount of risk you are willing to take.
- Federal employees: If you are eligible for employer-matching contributions then it’s probably best to invest in the TSP to receive the maximum matching contribution. After you have put in enough money to get the match, then it would probably be best to invest in a Roth IRA if you are eligible and if you know how to invest well.
- Military members in the blended retirement system: We would generally recommend the same as above.
- Military members in the legacy retirement system: Since you do not receive matching contributions for a TSP then you may consider maxing out your Roth IRA first if eligible and then investing in a TSP if you still have funds available.
- Deployed military members: Even if you are in the legacy retirement system, if you are deployed in a tax-free zone then it may be worth investing in the Roth TSP first.
Can I contribute to both a Roth TSP and a Roth IRA?
Yes, you can contribute to both a Roth TSP and a Roth IRA as long as you meet the eligibility requirements for both types of plans.
Do military members get any special benefits for a Roth IRA or Roth TSP?
There are no special benefits for a Roth IRA. However, there are special benefits for a Roth TSP. If you are a military member then you can make tax-free TSP contributions with money that you earned while deployed to tax-free zones. The earnings will be taxable but the principal funds will not be taxable at retirement age. This only applies to military members and not federal workers. If you want to see if you have any tax-exempt funds in your TSP account then look under balance and there will be a line that states: “Your tax-exempt balance.”
Start saving for your retirement with a Roth IRA or Roth TSP
A Roth IRA and a Roth TSP are both great options for saving money for retirement. Investing for your retirement is one of the best things that you can do for your financial future. It’s going to give you more flexibility and options in the future. If you are interested in having a comprehensive financial plan, schedule a free discovery call with one of our fee-only financial advisors today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.
