Roth IRA vs Roth TSP: Enhance Your Retirement Savings

Are you planning for retirement and unsure where to invest? If you're in the military or work as a federal government employee, you’ve likely come across the Thrift Savings Plan (TSP). Both TSPs and IRAs offer Roth options, meaning your contributions are made with after-tax dollars, and withdrawals during retirement are tax-free. If you’re deciding between a Roth TSP or a Roth IRA, we’ll break down each option in detail below to help you make an informed choice.

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What is a Roth TSP?

A Roth TSP is a retirement savings plan for federal employees and military personnel. It's similar to a 401(k) but specifically designed for government workers. Your employer, yourself, or both of you can make regular contributions into the plan. While contributions aren't tax-deductible now, your withdrawals in retirement will be tax-free.

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What is a Roth IRA?

A Roth IRA is a retirement account that offers tax-free withdrawals in retirement. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, meaning you don't get a tax break upfront.

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To contribute to a Roth IRA, you must have earned income during the year and meet certain income limits. The maximum amount you can contribute annually is limited and depends on your tax filing status and Modified Adjusted Gross Income

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About The Federal Employees Retirement System

The Roth TSP is part of the FERS retirement program. FERS provides benefits from three sources: a Basic Benefit Plan, Social Security, and the TSP.

FERS employees contribute to the Basic Benefit and Social Security parts through payroll deductions. Your agency also contributes to FERS.

If you are a federal employee, you are automatically enrolled in FERS. After retirement, you receive monthly payments for life.

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Are Roth TSPs and Roth IRAs the same? Let's compare these retirement savings accounts.

A Roth TSP is similar to a Roth IRA but there are some differences. Let's explore them in detail.

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Roth TSP vs Roth IRA: What are Similarities Between

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• Roth TSP and Roth IRA contributions are made with after-tax dollars, meaning they don't reduce your taxable income now. However, this also means you can withdraw funds tax-free in retirement.

• To avoid a 10% early withdrawal penalty, you must generally wait until age 59 ½ to take distributions from a Roth TSP or Roth IRA.

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Roth TSP vs Roth IRA: What are The Differences?

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1. Plan Type: 

• A TSP is a retirement savings plan offered by employers, specifically designed for federal government employees.
• Roth IRA is An individual retirement account accessible to anyone with earned income. You can open and contribute to a Roth IRA through a brokerage firm.

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2. Contribution Limits:

• For 2024, the contribution limit for a Roth TSP is set at $23,000. Individuals aged 50 and above can add an extra $7,500, bringing the total employee contribution limit to $30,500. Federal government employees who began their service between August 1, 2010, and September 30, 2020, will automatically have 3% of their salary directed into their TSP (this applies to pre-tax TSP contributions, not Roth TSP). For those hired after October 1, 2020, the automatic contribution increases to 5% of their salary (again, for pre-tax TSP contributions, not Roth TSP).

• The contribution limit for a Roth IRA in 2024 is $7,000. Individuals aged 50 and older can contribute an additional $1,000, bringing their total limit to $7,500. Unlike some retirement plans, there are no automatic contributions to a Roth IRA; you must arrange the transfers yourself to ensure that funds are deposited into your account.

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3. Employer contributions:

• When you contribute to a Roth TSP, you will benefit from employer contributions. You’ll automatically receive 1% of your salary deposited into your traditional TSP, regardless of whether you make any contributions. Additionally, you can receive a matching contribution from your employer, which can be up to 5% of your salary. However, total employer contributions will not exceed 5%.

• In contrast, there are no matching contributions for a Roth IRA. The only funds that go into a Roth IRA are those that you contribute.

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4. Investments:

• If you have a Roth TSP then you can choose from five different fund options.These are the G Fund, F Fund, C Fund, S, Fund, and I Fund. There is also the option for lifecycle funds. These are a diversified mix of the five individual funds. The fund will automatically adjust your risk the closer that you get to retirement options. Federal employees can now also invest in various mutual funds through the TSP mutual fund window.

•  If you have a Roth IRA then you have access to a wide variety of investment options. These can include individual stocks, bonds, ETFs, mutual funds, and more.

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5. Loans:

• If you have a Roth TSP, you can take out a personal loan that can be used for any purpose. This loan must be repaid within five years. Additionally, there is an option for a residential loan, which is specifically for purchasing or building a primary residence, and this loan must be paid back within 15 years. It's important to note that these loans can only be taken against your own contributions, not your employer's contributions.

• If you have a Roth IRA then you cannot take out a loan.

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Should I roll over my Roth TSP to a Roth IRA?

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If you are near the age of 72, it might be wise to consider rolling your Roth TSP into a Roth IRA. However, before making this move, you should assess whether the investment options and associated fees align with your retirement objectives. It’s advisable to consult with your financial advisor to determine if this is the best course of action for you.

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Is a Roth TSP or Roth IRA better?

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Investing in a Roth TSP or a Roth IRA offers several advantages. A Roth TSP features higher contribution limits, automatic contributions, and matching contributions from employers. However, it does have limited investment options, and currently, individuals must begin taking Required Minimum Distributions (RMDs) at age 72.

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Roth IRAs provide a wide variety of investment options and do not require Required Minimum Distributions (RMDs). However, they come with lower contribution limits and income restrictions, which may prevent some individuals from contributing. Additionally, there are no employer contributions available. If your income exceeds the contribution limits for a Roth IRA, you might consider a backdoor Roth IRA as an alternative.

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1. TSP calculator
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Should I invest in a Roth TSP or a Roth IRA first?

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The decision between investing in a Roth TSP or a Roth IRA first will largely depend on your circumstances. Here are some general guidelines to consider, but it's advisable to consult with your financial advisor to tailor a strategy that fits your needs and risk tolerance.

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1. Federal Employees

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If you are eligible for employer-matching contributions, it is usually wise to start by investing in the TSP to take full advantage of the match. Once you’ve contributed enough to receive the maximum matching amount, consider shifting your focus to a Roth IRA if you qualify and are comfortable with investing.

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2. Military Members in the Blended Retirement System

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The recommendation is generally the same as for federal employees: prioritize the TSP to secure any employer match, then consider a Roth IRA afterward.

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3. Military Members in the Legacy Retirement System

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Since you do not have access to matching contributions with the TSP, it may be more beneficial to max out your Roth IRA first, if eligible. After that, you can invest in a TSP if you have additional funds available.

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4. Deployed Military Members

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Even if you are in the legacy retirement system, if you are deployed in a tax-free zone then it may be worth investing in the Roth TSP first.

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In Conclusion, If you are confused between Roth TSP vs Roth IRA Roth TSPs and Roth IRAs are excellent options for retirement savings. If you qualify for federal matching contributions, it's advisable to contribute at least enough to your TSP to receive this benefit, typically 3% of your salary. Beyond that, it can be beneficial to maintain a Roth IRA in addition to your Roth TSP, as there are no restrictions on contributing to both accounts. Ideally, maximizing contributions to both can significantly enhance your retirement savings.

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Roth IRAs are especially advantageous for those saving more than they anticipate needing for retirement, as they do not have Required Minimum Distributions (RMDs). This feature allows you to leave your Roth IRA to your heirs, enabling them to access the funds tax-free.

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