Roth TSP vs. Roth IRA: This is a choice that federal government employees and U.S. military professionals must make when considering a retirement savings plan. The real question is, do you go with the Thrift Savings Plan (TSP) account offered in the government plan or, like any civilian, fund a Roth Individual Retirement Account (Roth IRA) on your own?
Recent changes to the federal retirement program make this an easy choice. In short, your government employer is now matching part of your retirement savings at a more generous level than most private companies are offering these days.
Key Takeaways
- A Roth Individual Retirement Account is an individual retirement account that you open and fund directly at a bank, brokerage, or other financial institution.
- The Roth Thrift Savings Plan (TSP) is the U.S. government's version of a Roth 401(k) and is funded through payroll deductions.
- Roth IRAs and Roth TSPs have different rules regarding taxes, contribution limits, withdrawals, and required minimum distributions (RMDs).
- Roth IRA distributions are tax-free because contributions are funded with post-tax dollars.
- If you serve in the military for more than 60 days, you are automatically enrolled in a TSP program, which you can opt out of upon request.
About the Federal Employees Retirement System
The Roth Thrift Savings Plan (TSP) is part of the Federal Employees Retirement System (FERS). This is a retirement program that provides benefits from three sources: aBasic Benefit Plan, Social Security,and the Thrift Savings Plan (TSP).
Like people who work for private employers, FERS employees are required to help fund the cost of the Basic Benefit and Social Security parts of FERS through payroll deductions.
If you are a federal employee or member of the military, you are automatically enrolled in FERS. Typically, the agency withholds 4.4% of basic pay for FERS basic benefits, while the agency also contributes to FERS.
After employees retire, they receive monthly payments for the rest of their lives.
If you have a traditional account rather than a Roth, you will have to take a required minimum distribution (RMD) beginning the year you reach age 73. The age for taking RMDs has been raised to 73 from 72 as of Jan. 1, 2023. (Roth account owners aren’t subject to RMDs.) Starting Jan. 1, 2033, the age to start taking RMDs will change to 75. The penalty for failing to make an RMD has also been lowered but it’s still very severe at 25% of the remaining balance in the account.
Understanding the Roth Thrift Savings Plan
The Thrift Savings Plan (TSP) is the third part of the Federal Employees Retirement System (FERS). The TSP is an account automatically established for the employee.
The agency deposits an amount equal to a fixed percentage of the basic pay earned each pay period. The employee can also make contributions, and the agency makes matching contributions up to a set limit.
There are two options for a TSP: traditional or Roth. A Roth TSP is similar to a Roth IRA, meaning the Roth TSP has many of the same benefits. The money contributed by the employee to the TSP account is in after-tax dollars, meaning income taxes are deducted from your paycheck before the contribution is deposited into the TSP account.
Once you retire, you should owe no additional taxes. Your contributions and any investment gains earned are tax-free.
Automatic Matching Contributions
For FERS employees, the agency or service employing them contributes to the TSP account an amount equal to 1% of basic pay for each pay period. These contributions are called agency/service automatic (1%) contributions, and the employee doesn't even need to make contributions to receive them.
However, employees have to be vested before they own the money. Vesting is a period of years that employees must work before the money is fully theirs. It's three years for most FERS employees. FERS employees in congressional and certain noncareer positions can become vested after two years of service.
FERS Employee TSP Contributions
FERS employees hired on or after Oct. 1, 2020, are automatically enrolled in the TSP. Each pay period, 5% of basic pay is deducted and deposited into the employee's TSP account.
Those who began their federal service between Aug. 1, 2010, and Sept. 30, 2020, are automatically enrolled for a 3% payroll deduction.
The employee has the right to opt out of the contribution.
Agency Matching Contributions
Employees receive matching contributions from the agency or service based on their contributions.
The match equals the first 5% of pay that an employee contributes each pay period. The first 3% of pay contributed is matched dollar-for-dollar, meaning the employee receives another 3% of pay.
The next 2% contributed by the employee is matched at 50 cents per dollar, meaning the employee receives 1% of pay for the 2% contributed by the employee.
| How the 5% Agency Match Equals the 5% of Employee Contributions | |
|---|---|
| Employee Contribution | Agency Match |
| 3% per pay period | 3% (dollar-for-dollar) |
| 2% per pay period | 1% (matches 50 cents per dollar) |
| No contribution needed | 1% automatic contribution |
Any employee contributions beyond 5% of pay will not be matched by the agency. The rules and the matching amounts are slightly different depending on whether the employee is military or a civilian.
What Is the Blended Retirement System (BRS) for Military Personnel?
Launched in 2018, the Blended Retirement System (BRS) allows military personnel to join a new program that blends two significant sources of retirement income, the annuity for career service and the Thrift Savings Plan.
The annuity portion is a much-reduced legacy of the old Civil Service Retirement System (CSRS), which was, until 1984, the only government retirement program. The few remaining employees on that old legacy plan will get a much more generous annuity, but they aren't eligible for the TSP employer match.
Those who are interested have to opt in to join the BRS. It's a reasonably comprehensive retirement plan with its own rules and options.
By contrast, you don't have to opt into the TSP program. After serving 60 days, the military will automatically start contributing 1% of your salary. It will automatically begin deducting 3% of your base pay to the TSP, although you can opt out of that anytime. The government contribution will continue if you're in the BRS.
Thrift Savings Plan Contribution Limits
TSPs have the same contribution and catch-up limits as the 401(k) plans available to many private-sector employees. The Thrift Savings Plan contribution limits for 2024 are as follows:
- 23,000 if you're under the age of 50
- $30,500 if you’re age 50 or older including a catch-up contribution of $7,500
What Is a Thrift Savings Plan (TSP)?
Many private employers offer their employees a 401(k) retirement savings plan. The government created its own retirement savings plan for its employees and military personnel and called it the Thrift Savings Plan (TSP).
The purpose of a TSP is to allow employees to build a retirement savings account over time by setting aside a percentage of their paychecks to be invested and grow until they retire and are ready to spend the money.
Like 401(k) plans, TSP plans come in two basic flavors, and the employee can choose which to take:
- If you have a traditional TSP, the money you pay into the account comes out of your pre-tax dollars. That is, it's taken off the top of your gross pay, and you don't pay income taxes on it until you retire and start withdrawing money. At that time, you will owe income taxes on both the principal and the interest your money earned. Government employers have offered the traditional TSP since 1986.
- If you have a Roth TSP, you'll pay in post-tax dollars. The taxes owed on the income will be withheld that year. When you retire, the entire proceeds are tax-free. The Roth TSP has been offered only since 2012.
Summary of Roth TSP and Traditional TSP Rules
Whichever you choose, the rules are similar to those for private-sector employees, with some consideration for the needs of federal employees and military personnel:
- You can contribute up to a maximum annual limit, which may be adjusted annually. For the 2023 tax year, the maximum is $22,500, plus $7,500 if you're age 50 or older. In 2024, it goes up to $23,000, plus $7,500 if you're age 50 or older. That's for a Roth TSP, a traditional TSP, or even a combination of accounts if you have more than one.
- Your federal employer makes a contribution of a minimum of 1% and as much as 5% to your account.
- Your money will be invested in your choice of several investment funds and "lifecycle" funds. The latter are funds that gradually reduce risk to your principal as you approach retirement age.
As of Nov. 30, 2023, the YTD returns of the Thrift Savings Plan funds ranged from 6.99% to 16.75%.
How the Roth TSP and the Traditional TSP Differ
In either case, this is your retirement account, so you are discouraged from making early withdrawals. But the rules are different for a Roth TSP and a traditional TSP:
- You can't touch the money in your traditional TSP before you reach age 55 (if you retire or separate) or age 59 1/2 (whether or not you retire), or you will pay a tax penalty. In any case, you'll also owe income taxes on that money in the year you withdraw it.
- You can take the principal in your Roth TSP any time you want. It's your money, and you already paid the income taxes. But you can't touch any of the profits your money earned without paying a penalty.
- When you reach age 73, you must take some money out of your traditional IRA account every year. This is the "required minimum distribution" or RMD. There are no similar restrictions on a Roth account. The age changes to 75 on Jan. 1, 2033. (The minimum age for RMDs was increased from 72 as of Jan. 1, 2023.)
The Roth option can be great because you will not have to pay taxes during your retirement. But only you can decide whether you can spare the greater loss to your paycheck that paying the income taxes upfront will entail.
Tax Benefits and Saver's Credit
In 2023, the income ranges for eligibility to make deductible contributions to traditional Individual IRAs and Roth IRAs will increase as long as taxpayers meet certain criteria.
If either the taxpayer or the taxpayer's spouse is covered by a retirement plan at work, the deduction may be reduced or phased out depending on income levels. As of the 2023 tax year, the amount is $228,000 for a married couple who file joint taxes and $153,000 for individuals. In 2024, those amounts are $240,000 for married couples filing jointly and $161,000 for individuals.
To claim a saver's credit and take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan, certain criteria also apply. The saver’s credit matches up to 50% of $2,000 for single filers or $4,000 for married couples filing jointly. Qualifying individuals can receive up to a $1,000 tax credit and couples can receive up to $2,000.
However, the saver’s credit phases out as income level increases. Individuals making more than $38,250 in 2024 and married couples filing joint returns who make more than $76,500 in 2024 are no longer eligible for the credit.
Combat Zone Tax Exclusion
If you're a member of the military, TSP taxes may work differently because of the Combat Zone Tax Exclusion (CZTE). The income you earn while deployed in a combat zone is excluded from your taxable income.
Combat zone pay is tax-freeand doesn’t count toward the saver’s credit phase-out limits for eligible individuals. When contributing to a Roth IRA in a tax-free combat zone, military members who are deployed can divert money into a Roth IRA and never pay tax on the contributions or earnings.
How Do Roth TSPs and Roth IRAs Compare?
While Roth TSPs and Roth IRAs are excellent retirement-savings vehicles, they have different characteristics and benefits. Here’s a comparison.
Similarities
Both are after-tax retirement accounts. You pay taxes on your contributions the year you make them (unless you qualify for tax-exempt contributions). Contributions and earnings grow tax-free, and qualified withdrawals are tax-free, as well (except for matching contributions).
Both are subject to the five-year rule. To take tax-free distributions, you must be at least age 59½ or have a permanent disability, and at least five years must have passed since Jan. 1 of the year you first contributed.
Differences
Only the TSP is a payroll deduction. With a Roth IRA, you would open an account and contribute to it directly. Roth TSP contributions come out of payroll deductions.
Only the TSP has no income limits. Roth IRAs are subject to income limits, but you can contribute to a Roth TSP no matter how much you earn.
You can't withdraw money early from a TSP. You can withdraw your Roth IRA contributions at any time, with no tax or penalty, but this is not an option with a Roth TSP.
You must make minimum withdrawals from a Roth TSP. Roth IRAs have no required minimum distributions (RMDs) during your lifetime. But you must start taking RMDs from a Roth TSP at age 73 (unless you're still working at your federal job).
Roth IRA vs. Roth TSP: Which Is Better for You?
There's an important question to ask before you decide: Do I qualify for matching funds? If you're a civilian employee and qualify, you should contribute at least up to the federal match first because you're automatically earning 100% on matched money (think: free money).
On the other hand, a Roth IRA has the same excellent tax benefits plus freedom from required minimum distributions later in life. No RMDs mean you can leave your savings untouched if you don't need the money, andyour beneficiaries can enjoy years of tax-free growth and income.
Then, if you have extra money left to contribute, consider either a regular or Roth TSP contribution, depending on whether you want a tax deduction now or later.
What Are the Differences Between a Roth TSP and a Roth IRA?
There are some key differences. The TSP is funded only by payroll deduction and has no income limits. You cannot withdraw money early from the TSP, and you must make minimum withdrawals from a Roth TSP.
Is a Roth IRA or a Roth TSP Better?
It depends, but most people should contribute to their TSP at least up to the matching funds limit (3% of your salary). Beyond this, the TSP is better if your taxes are high today and you expect them to be much lower in retirement. It is better to use your deduction against the higher tax rate. The Roth IRA is better the further away you are from retirement.
Can You Contribute to Both a Roth TSP and a Roth IRA?
The contribution limits don't overlap between TSPs and IRAs. As a result, each dollar that you contribute to a TSP doesn't reduce the contribution limit for IRAs. However, the limits are cumulative between Roth and traditional TSPs, and between Roth and traditional IRAs.
The Bottom Line
Roth TSPs and Roth IRAs are excellent ways to save for retirement. If you qualify for federal match funds, you should contribute to your TSP at least up to this limit (3% of your salary). Beyond this, it can make sense to have a Roth IRA alongside your Roth TSP: No rules prevent you from contributing to both. Ideally, you could max out both accounts to boost your retirement savings.
Roth IRAs are particularly useful if you are saving more than you think you'll need for retirement because there are no required minimum distributions (RMDs) for these accounts. This means that you can leave your Roth IRA to your heirs, and they can access this tax-free.
Before making any decisions about your retirement savings accounts, it's helpful to discuss your options with a trusted financial planner or advisor.
