In 2012, the Thrift Savings Plan (TSP) introduced the Roth TSP option, allowing federal employees to invest after-tax income and enjoy tax-free withdrawals in retirement. If you’re wondering whether the Roth TSP is a good fit for your financial future, here’s a breakdown of the pros and cons to consider.
Pro: Good for Higher Tax Brackets in Retirement
If you expect to be in a higher tax bracket when you retire, a Roth TSP can be beneficial. After 2025, the current tax cuts will expire, and tax rates may go back to previous levels. In that case, the Roth TSP’s tax-free withdrawals could save you money in the long run.
Con: Two Rules for Tax-Free Withdrawals
To withdraw money tax-free from a Roth TSP, you must meet two conditions:
- Five years must have passed since January 1 of the year you made your first Roth TSP contribution.
- You must be at least 59½ years old, permanently disabled, or deceased.
If these conditions aren’t met, you’ll only owe taxes on your earnings, not your contributions.
Pro: Tax-Free Emergency Fund
If you need a large sum in an emergency, withdrawing from a traditional TSP could push you into a higher tax bracket. However, withdrawing from your Roth TSP allows you to take out money without owing taxes on your contributions or qualified earnings.
Con: No Transfers from Roth IRA to Roth TSP
You can’t move money from a Roth IRA into your Roth TSP account. If you already have a Roth IRA, this could be a downside as there’s no way to combine the funds.
Pro: No More Required Minimum Distributions (RMDs)
Starting January 1, 2024, you won’t have to worry about Required Minimum Distributions (RMDs) from your Roth TSP. This means you can keep growing your Roth TSP funds without being forced to withdraw them at a certain age.
Before you make a final decision, connect with an FRC® trained advisor who fully understands how your TSP works.
