The Thrift Savings plan is a retirement plan offered to eligible Federal employees. Within this plan there is a Roth option.
From my experience in working with Federal employees, many misunderstand the Roth TSP option that is available.
At its core, the Roth TSP can be a very effective retirement vehicle if used properly. The Roth TSP is built very similar to the Roth IRA but with key differences.
Starting with the similarities, Roth TSP contributions come from “after-tax” wages from your paycheck, like Roth IRA contributions. This means there is no tax deduction to contribute into both Roth accounts. The main benefit is when you take your money out.
Both Roth accounts have the ability to take withdrawals with no taxes as long as two rules are followed.
One, the Roth TSP/IRA account owner is 59 ½ years old. Two, the Roth account has been opened for at least five years.
If those two rules are met, withdrawals will be “tax-free” to the account owner.
Starting in 2019, TSP contribution limits were increased to $19,000 per year.
This aggregate limit applies to total Roth TSP and Traditional TSP contributions for the calendar year.
For example, a participant may contribute $19,000 into his or her Roth TSP entirely or split 50/50, $9,500 into the Traditional TSP and $9,500 into the Roth TSP.
Any combination of contributions is acceptable if total contributions are at or under $19,000.
Now let’s review some drawbacks of the Roth TSP.
In my professional opinion, there are two.
First, limited investment options. The exact same funds are available to you in both the Roth and Traditional TSP. The five letter funds and the L funds.
While the TSP funds are very low cost, they only allow you to diversify in five different asset classes. This means you may only invest in the U.S. large cap index (C Fund), U.S. bond index (F Fund), and so forth.
With limited investment options it is challenging to build a well-diversified portfolio among just five types of funds. I’d personally like to see the TSP add an emerging markets fund, real estate fund and international bond fund to name a few.
The second drawback of the Roth TSP is at 70 ½ years old.
The Roth TSP is still subject to government RMDs (Required Minimum Distributions) each year after 70 ½ years old. This means, the IRS will require you to take a certain amount of money from your Roth TSP based on life expectancy tables.
The required distribution increases each year.
In summary, a few factors should be evaluated when deciding if the Roth TSP option is right for you.
Such as, are you getting a tax refund each year? Can you “afford” to skip the tax deduction via Traditional TSP contributions?
Also, will your other retirement assets be subject to RMDs at 70 ½ years old, are your accounts diversified from a tax perspective in retirement?
Talk to a Certified Financial Planner that is familiar with your Federal benefits.
Contact us for a “no-cost” review.
This publication is not affiliated with nor endorsed by the Federal Government. Employees should consult with their Human Resources Department for further information on plan details including eligibility and questions regarding any additional benefits not covered in this article. Employees should consult with their tax professional regarding their personal tax situation.
Securities and investment advisory services offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC. 5187 Utica Ridge Rd., Davenport, IA 52807. 563-326-2064.
More about the Author
As an independent CERTIFIED FINANCIAL PLANNER™ in Bartlett, IL (a western suburb of Chicago) my practice serves three specific professions:
Federal employees, Healthcare professionals and Business owners.
My team helps navigate both the wealth accumulation and retirement de-cumulation phases for these professionals. We do this through comprehensive financial planning which includes taking into account your specific employer retirement benefits (403b, TSP, SEP IRA, etc), tax implications, RMDs and proper diversification among all investment accounts.
Our goal is to save you precious time, stress and your hard-earned money versus tackling this all alone. Let a skilled team of experts like us, already familiar with your employer benefits, unique needs and goals guide you through the constant changes in your life towards ultimate financial independence.
Dustin Javier, CFP® AWMA®
CERTIFIED FINANCIAL PLANNER™
President | Dean Johnson Advisory, LLC
Securities and investment advisory services offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC. 5187 Utica Ridge Rd., Davenport, IA 52807. (563) 326 2064. www.ausdal.com Dean Johnson Advisory and Ausdal Financial Partners are independently owned and operated.