TSP and Roth options


Q: I’m curious as to why you are unconvinced that paying tax on Roth TSP contributions now and then withdrawing your balance tax-free is not necessarily a better option than deferring tax payments on traditional TSP contributions and then withdrawing the balance at a lower tax rate.
I used the following assumptions:
Annual contributions – $17,000
Tax rate – working 18 percent
Tax rate – retirement 14 percent
Interest rate (all years) 6 percent
Compounding periods 26
Years of service 25
I show identical balances after 25 years. I then assume 35 years of equal monthly withdrawals (6 percent annual earnings). I show a tax burden of $330,003.12 for the traditional TSP and $76,500 for the Roth, a difference of $253,503.12. Is there something I’m missing? I’m not a financial professional, just a guy with Excel and a curious mind, but the advantage in this case seems to be clearly to the Roth.

A: You’ve pumped up the Roth savings contributions by neglecting to reduce them by the 18 percent tax rate. Try $17,000 to the traditional TSP and $13,940 to the Roth. These amounts equalize the reduction to your paycheck.
To simplify the analysis, consider this example:
Contribute $17,000 to the traditional TSP and assume that it quadruples in value to $68,000 over 20 years. Withdraw it under an 14 percent tax rate and you’ll be left with $58,480 to spend in retirement. Alternately, contribute $13,940 to the Roth option and assume that it quadruples in value to $55,760 over 20 years. Withdraw it with no tax loss and you’ll be left with $55,760 to spend retirement. Notice that, in this scenario, using the Roth will reduce your standard of living in retirement by about 4.65 percent.


About Author

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at money.federaltimes.com.


  1. Roth contributions will not be required to be reduced by the pre-contribution tax. You will be able to contribute $17000 to either the traditional TSP or Roth TSP, or $17000 mixed between the two.

    It’s the same as contributions to Roth IRAs and traditional IRAs…. The same limit applies and is not reduced by an individual’s tax rates.

  2. Greg – No one is saying that contributions to the Roth are limited to a lower amount than for the traditional. The point is that if a person contributes the same amount to the Roth as they had been to the traditional, they’ll end up with substantially less take home. That’s where the difference comes from.

  3. Sure Greg, however in the case of a Roth, when you contribute $17k to the account, there would be an additional $5k out of pocket expense for the taxes. The $13,940 Roth contribution cited is the after tax equivalent of a $17k pre-tax contributions. The respose is designed to compare apples to apples.

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