The Roth TSP, Remember Me?

This article was originally written by our own John Stohlman and posted on FedSmith.com.

With all the talk about the TSP possibly opening up a mutual fund window and expanding withdrawal options, you may have forgotten that it also offers a Roth option, which began in 2012.

The Roth TSP combines the after-tax (no upfront tax deduction) option with the existing benefits of the TSP, which are the universally renowned low administrative costs.

There are three options to choose from when allocating your TSP contribution:

1. Contribute 100% to your traditional TSP account
2. Contribute 100% to your Roth TSP account
3. Allocate any percentage of your contribution to either of these two accounts

TSP and Taxes

As you’re probably aware, your contributions to the traditional account are withheld from your pay and not included in your income for income tax purposes.

But it’s easy to forget that once you start withdrawing from your TSP account, every penny will be taxed, both the contributions and the earnings.

Taxes aren’t eliminated with your TSP account, they are just deferred. However, studies show that tax-deferred growth is much better for the investor than being taxed upfront upon receipt.

Withdrawing Roth TSP

When you contribute to your Roth TSP, those contributions are still included in your income and taxed in the year earned.

But when you or your designated beneficiary withdraw the money from the account, it will not be taxed again. Even more importantly, the earnings in the account will never be taxed.

But remember, this great deal only applies if five years have passed since January 1st of the year you made your first contribution to the Roth TSP account, and you are either age 59½ or older, permanently disabled, deceased, or a first-time homebuyer.

Contributions

Now, there’s one curious but unfortunate little aspect of the Roth TSP that you should be aware of: government matching, which can be up to 5% of your salary, is put into your traditional account.

To read the rest of the article, you can visit FedSmith.com by clicking here.

For over 30 years, federal employee retirement planning has been a key focus of Medallion Financial Group. We recognize that FERS retirement benefits have extra layers of complexity, such as the Thrift Savings Plan (TSP), 401K, Pension plan, FEGLI and more. It’s easy to get lost in a sea of bad advice when so few people understand the basics. We help with the basics and beyond to enable our clients to get the education and advice they need to retire with confidence.

Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.

We strive to exceed client’s expectations – because we have high expectations of ourselves.