The difference between a Roth TSP and a traditional Thrift Savings Plan account is similar to the difference between an individual retirement account and its Roth alternative. A traditional plan gives you a tax break now when you make your contribution but funds are taxed when they’re withdrawn upon retirement. A Roth plan does the opposite: you do not get to deduct any amount from your income taxes for making a contribution, but you will not have to pay income taxes upon receiving those funds in retirement.
The Roth’s advantages for younger people
Many analysts consider the Roth plan particularly advantageous to people who anticipate being in a higher income tax bracket in retirement than they are at the present time.
Given that, Redden said that the Roth TSP is an especially good deal for young people who are just beginning their career in the federal service and anticipate being in government for a long time.
“When you think about the salary of a federal employee in their twenties or thirties today versus what their salary and even what their benefits will be many years later in retirement, clearly they’re probably at their lowest tax bracket now than they will be later on in retirement,” Redden said.
“The long-term effect is, quite honestly, that — by putting money into the TSP Roth now — that could really grow to a huge amount of tax-free income later on in retirement,” he added.
Agencies will continue to match TSP contributions
Redden said that employees should not be deterred by the fact that agencies will not be allowed to put their matching contributions into the Roth account.
Currently, agencies match an employee’s contributions to the Thrift Savings Plan in any amount that does not exceed five percent of the worker’s annual pay.
Redden said that agencies will continue to match retirement funds at that rate but will have to put the monies in a traditional TSP, so you will have to pay taxes on that part of your distributions in retirement. “But you certainly want to get that match, because that’s free money,” added Elliott.
Most federal employees will have the option of investing all or any part of their TSP savings in a Roth-type retirement account as of May 7 of this year.
However, the rollout of the Roth plan has been delayed for employees of some agencies, including Defense.