There’s a high chance that you are not using the Roth TSP right now. Currently, only 36% of federal employees are using the Roth TSP. Today we’re going to be looking at some of the reasons why federal employees don’t use Roth TSP and some of the benefits that they might be missing out on.
Traditional TSP was First
The Roth TSP is a relatively new addition to the TSP. It was added in 2012 so many federal employees did not start their careers with the Roth TSP option.
This might be a reason that more people aren’t taking advantage of this benefit. If the Roth TSP had come before the traditional TSP, I’m certain more people would be invested in it.
Tax Deduction
For tax purposes, the Roth TSP is the opposite of the traditional TSP. With the Traditional TSP you can take a tax deduction now and you pay the tax when you take the money out in retirement.
Most people don’t consider using Roth because they assume that they’ll be in a lower tax bracket in retirement so they figure they won’t mind paying the taxes then.
However, in my experience, most feds are in the same tax bracket in retirement as they were while working. And that is a good thing! That means that you are probably able to maintain your standard of living into retirement.
Are Tax Brackets Going to Increase?
One benefit that the Roth TSP has to offer is the safety it can bring in case tax brackets go up in the future. And many people (myself included) are fairly certain that tax rates are going to go up over time.
But if you have a lot of Roth TSP then it doesn’t matter how tax brackets change because your Roth TSP money is completely tax-free.
Having more Roth money is a great way to protect yourself from the possibility of higher taxes in the future.
Employer Match
Another reason that some don’t use the Roth TSP is the misconception that people can’t get the 5% employer match if they invest everything into the Roth TSP. This is not true.
Even if you invest 100% of your TSP contributions into a Roth account, you will still receive the employer match. But, at least at the time of writing this article, the employer match will always go into your traditional TSP account rather than your Roth.
Use Roth to Maximize the TSP
If you are trying to put as much money into the TSP as possible, the Roth TSP can help.
For example, let’s say you put $23,000 into your Traditional TSP this year and your friend put $23,000 into their Roth TSP this year. Who contributed more?
While you both put the same dollar amount in, your friend’s contribution is worth more because $23,000 after-tax into the Roth is worth more than $23,000 pre-tax into the traditional.
Note: If you are under 50 then the most you can put into the TSP is $23,000/year in 2024. And the $23,000/year limit is shared between the Roth and traditional sides.
No Roth TSP? Roth Conversions
But what if you’ve used the traditional TSP your whole career and are just now learning about the Roth?
Don’t worry! Outside of contributing money directly into the Roth TSP, there is one more way to get money to a Roth account over time.
It is called Roth conversions. In a nutshell, a Roth conversion is the process of moving pre-tax Traditional TSP dollars over to a Roth IRA overtime.
Roth conversions are most often done by those in retirement but you want to be careful to move over too much in a single tax year.
Conclusion
I am certainly a huge fan of the Roth TSP but there is no perfect answer for everyone.
There are simply pros and cons for every situation. If you would like to see situations where the Roth TSP doesn’t make sense, click here.
