Roth TSP vs Roth IRA

Both Thrift Savings Plans (TSPs) and Individual Retirement Accounts (IRAs) offer traditional and Roth options. A key difference between a Roth TSP and a Roth IRA is eligibility for contributions. Federal employees and military members can contribute to a Roth TSP, while anyone with earned income within IRS income limits can contribute to a Roth IRA.

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What Are Roth Thrift Savings Plans (TSP)?

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A Roth Thrift Savings Plan (TSP) is a retirement savings option available to federal employees and members of the uniformed services. It operates within the broader Thrift Savings Plan (TSP), which is similar to a 401(k) plan for government workers.

Key Features of a Roth TSP

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• After-Tax Contributions – Contributions to a Roth TSP are made with after-tax income, meaning you pay taxes on the money before it enters the account.
• Tax-Free Withdrawals – Qualified withdrawals, including both contributions and earnings, are tax-free in retirement if:
• You are at least 59½ years old, and
• The account has been open for at least five years.
• Employer Matching – Federal agencies match up to 5% of basic pay for employees under the Federal Employees Retirement System (FERS). However, employer-matched funds are deposited into a traditional TSP, not a Roth TSP, and will be taxed upon withdrawal.
• Contribution Limits – The IRS sets annual limits on Roth TSP contributions. These limits are the same as for traditional TSP accounts.
• Required Minimum Distributions (RMDs) – Unlike a Roth IRA, a Roth TSP does require RMDs starting at age 73 (unless rolled over into a Roth IRA).

The Thrift Savings Plan (TSP) has updated its contribution limits for 2025, reflecting adjustments for inflation and legislative changes. Here's a summary of the key limits:

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Elective Deferrals: This is the maximum amount you can contribute from your salary to your TSP account. For 2025, this limit has increased to $23,500.

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Catch-Up Contributions:

• Ages 50-59 and 64+: Individuals in these age groups can make additional catch-up contributions up to $7,500. This means a total potential contribution of $31,000 for tsp catch up 2025.
• Ages 60-63: A new provision under the SECURE Act 2.0 allows for a higher catch-up contribution limit of $11,250 for participants aged 60 to 63 in 2025. This enables a total potential contribution of $34,750 for individuals in this age bracket.

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Also read - 403b contributions limits 2025

Who Should Consider a Roth TSP?

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• Federal employees who expect to be in a higher tax bracket in retirement.
• Younger employees who have decades of tax-free growth potential.
• Individuals who want tax diversification in retirement.

What Are Roth IRAs?

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A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars and make qualified withdrawals tax-free in retirement. These accounts are available through brokerages, banks, and other financial institutions, rather than through employers.

To contribute to a Roth IRA, you must have earned income. The IRS sets annual contribution limits, including additional catch-up contributions for individuals aged 50 or older. For both 2024 and 2025, the contribution limits are:

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These limits apply to the total contributions made to all your IRAs combined. Rollover contributions and qualified reservist repayments do not count toward these limits.

Your ability to contribute to a Roth IRA also depends on your modified adjusted gross income (MAGI) and tax filing status. The income thresholds for full contributions are:

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2024:

• Single or Head of Household: MAGI less than $146,000.
• Married Filing Jointly or Qualifying Widow(er): MAGI less than $230,000.

2025:

• Single or Head of Household: MAGI less than $150,000.
• Married Filing Jointly or Qualifying Widow(er): MAGI less than $236,000.

If your MAGI exceeds these amounts, your contribution limit is reduced and eventually phased out. For example, in 2025, single filers with a MAGI between $150,000 and $165,000 can contribute a reduced amount, while those with a MAGI above $165,000 are ineligible to contribute directly to a Roth IRA.

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One significant advantage of Roth IRAs is the absence of required minimum distributions (RMDs), allowing you to leave funds in your account indefinitely. Additionally, you can withdraw your original contributions at any time without taxes or penalties, providing flexibility in managing your retirement savings.

As Brian Walsh, CFP® and Head of Advice & Planning at SoFi, notes:

"Roth IRAs provide additional flexibility to withdraw from an account during retirement without paying taxes. Additionally, it can be especially beneficial for people who are currently in a low income-tax bracket and expect to be in a higher income tax bracket in the future."

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Pros: Roth TSP vs Roth IRA

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Both the Roth Thrift Savings Plan (TSP) and the Roth Individual Retirement Account (IRA) offer tax-free growth and tax-free withdrawals in retirement, but they have key differences that may make one more beneficial depending on your financial situation. Here’s a breakdown of their advantages:

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Pros of a Roth TSP

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• In 2025, you can contribute up to $23,500 (or $30,500 if you’re 50 or older).
• This is much higher than the Roth IRA limit of $7,000 (or $8,000 for those 50+).
• If you’re a FERS employee or military service member, your agency or branch matches contributions up to 5% of your salary (though matching contributions go into a traditional TSP account, not Roth).
• Unlike Roth IRAs, which limit contributions based on your income, anyone with a TSP account can contribute to a Roth TSP.
• Contributions come directly from your paycheck, making it easy to stay consistent with savings.
• The TSP offers low-cost index funds and lifecycle (L) funds designed for long-term growth with minimal fees compared to many IRAs.

Pros of a Roth IRA

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• A Roth IRA allows you to invest in stocks, bonds, ETFs, mutual funds, and real estate—giving you more control over your portfolio compared to the limited TSP fund options.
• Unlike the Roth TSP, which requires RMDs at age 73, a Roth IRA lets you keep your money growing tax-free indefinitely—a major benefit for estate planning.
• With a Roth IRA, you can withdraw contributions at any time (penalty-free) for emergencies, while Roth TSP withdrawals before retirement may come with restrictions.
• If you pass down a Roth IRA, your heirs do not have to pay taxes on withdrawals (if rules are followed), whereas Roth TSP funds may be subject to RMDs.

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Which One is Right for You?

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Cons: Roth TSP vs Roth IRA

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Cons of a Roth TSP

• The TSP only offers a few index funds and lifecycle (L) funds, which limits diversification compared to a Roth IRA, where you can invest in stocks, bonds, ETFs, mutual funds, and even real estate.
• Unlike a Roth IRA, which allows you to keep funds tax-free indefinitely, the Roth TSP requires RMDs starting at age 73, reducing long-term tax-free growth potential.
• While the Roth IRA lets you withdraw contributions anytime penalty-free, Roth TSP withdrawals come with more restrictions, especially before retirement. If you separate from service before age 59½, you may owe penalties on withdrawals.
• While employer contributions are a great benefit, they go into a Traditional TSP account, not your Roth TSP, meaning they’ll be taxed later.
• After leaving federal employment, your withdrawal options are more restrictive than a Roth IRA. Many retirees roll over their Roth TSP into a Roth IRA for more control.

Cons of a Roth IRA

• In 2025, Roth IRA contributions are capped at $7,000 ($8,000 if 50+), while Roth TSP contributions can be as high as $23,500 ($30,500 if 50+), making it harder to build a large retirement fund quickly.
• High earners may not qualify for direct Roth IRA contributions:
• Single filers: Phase-out begins at $150,000 (ineligible at $165,000).
• Married filing jointly: Phase-out begins at $236,000 (ineligible at $246,000).
• If you exceed these limits, you’ll need to use a Backdoor Roth IRA, which requires extra steps.
• Unlike the Roth TSP, which offers matching contributions up to 5%, Roth IRAs rely solely on personal contributions.
• With a Roth IRA, you must research and manage investments yourself (unless you hire a financial advisor), whereas the TSP provides a simple, low-cost investment structure.

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Which One Has More Downsides?

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Comparison Chart: Roth TSP vs Roth IRA Similarities

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Roth TSP vs Roth IRA Comparison Table

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Roth TSP vs. Roth IRA: Which Is Better for Your Retirement Goals?

Best Strategy: Use Both

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For maximum retirement savings, consider using both accounts:

🔹 Step 1: Contribute to your Roth TSP – Get the full employer match and take advantage of the higher contribution limits.

🔹 Step 2: Contribute to a Roth IRA – If eligible, max out a Roth IRA for more investment flexibility and no RMDs.

This approach gives you the best of both worlds:

✅ Higher savings potential (Roth TSP)

✅ Employer matching contributions (Roth TSP)

✅ More investment choices (Roth IRA)

✅ No RMDs in retirement (Roth IRA)

Final Thoughts

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If you’re a federal employee or service member, start with the Roth TSP. The higher contribution limits and employer matching make it a powerful tool for building retirement savings.

If you want more investment options and flexibility, consider adding a Roth IRA. It provides more control over your money and lets you avoid RMDs.

Using both can help you maximize savings while balancing flexibility and tax-free growth.

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At Federal Pension Advisors, we specialise in guiding federal employees through these critical financial decisions. Our expert advisors help you navigate:

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Roth TSP & Roth IRA Strategies – Maximise contributions, balance flexibility, and optimise tax benefits.

Comprehensive Retirement Planning – Ensure a secure and stress-free future with a well-structured plan with federal retirement planning.

Financial Planning Services – From wealth management to tax-efficient strategies, we tailor plans to your needs.