Roth TSP vs. traditional TSP

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Q. I am 26 years old and I contribute 15 percent into my Thrift Savings Plan account. I have been reading suggestions on personal finance websites that I should consider placing a portion of my contribution into the Roth TSP to anticipate the possibility that I will be in a higher tax bracket around retirement. I was wondering what your opinion on this issue is and if it would be a good idea to place a portion of my TSP contributions in the Roth TSP.

A. I’m indifferent without any evidence that it will further your interests. It’s impossible to determine, in advance, that diverting some of your contributions to Roth will be beneficial. If a benefit is derived, it’s also impossible to determine, in advance, that it will be significant. Directing your contributions to Roth, rather than the traditional TSP, is agreeing to pay tax today in exchange for a possible benefit tomorrow. Without any clear evidence that it will be to your advantage, I guess I’d choose the simpler approach and contribute everything to the traditional TSP.

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3 Comments

  1. Roth IRAs provide potentially tax-free savings and distributions. Unlike a traditional IRA, you don’t get a deduction for your contributions. Instead, savings grow inside of the Roth IRA without needing to pay any taxes on the earnings and growth. Distributions from a Roth IRA are completely tax-free, as long as you meet certain conditions. You may be able to contribute to a Roth IRA even if you are covered by a retirement plan at work. Be aware that Roth IRAs do have income restrictions regarding who can fund a Roth.

  2. Congrats to the letter-writer for being proactive about retirement. Starting young will allow time to work in your favor.

    I disagree slightly with the recommendation. I would contribute half to each type of 401k, thereby giving yourself tax diversification. If you are in a higher bracket upon retirement, you’re covered. If you aren’t in a higher bracket upon retirement, you’re covered. The early earning years are the best time to seed a Roth account, as your current tax rates is probably at its lowest (unless you plan on making less money in the future).

  3. I generally agree, but I think there can be an advantage to having both roth and traditional retirement accounts during your retirement years. Suppose you have a $40,000 pension, your lifestyle requires $80,000, and $60,000 is the the line between the 15% and 25% tax bracket. If you had sufficient assets in both types of accounts, you could draw $20,000 from your traditional fund and then use the roth for the remaining $20,000, to limit the IRS bite to 15% each year (as long as you have sufficient assets in each).

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