Members of the United States military and federal government civilian employees have many options to save for retirement. Since 1987, under the Federal Employees Retirement System (FERS). they are eligible for a basic benefit plan (an annuity) and Social Security. In addition, they have access to the federal Thrift Savings Plan, a chance to add tax-advantaged personal savings to their retirement funds.

How does the Thrift Savings Plan compare with a Roth IRA? Which retirement plan is the most advantageous?

What is the Thrift Savings Plan (TSP)?

A defined-contribution retirement plan that is run by the Federal Retirement Thrift Investment Board, the Thrift Savings Plan (TSP) is the U.S. government’s version of the 401(k) retirement plan. Note that there are actually two different plans—one for civilian civil-service employees and one for members of the military.

Both versions of the Thrift Savings Plan parallel the contribution and catch-up limits of the 401(k) plans open to private-sector workers. In 2017, investors can contribute up to $18,000 each year to their TSP, and investors who are age 50 and over can include a catch up-contribution of $6,000 per year for a total allowed contribution of $24,000.

The Thrift Savings Plan (TSP)  also offers an after-tax Roth option similar to a Roth 401(k).

Benefits of the Thrift Savings Plan

The Thrift Savings Plan offers a number of benefits. It is a tax-deferred retirement plan: The annual amount contributed (or “deferred,”  in retirement plan-speak) reduces your taxable income for that year. The investment continues to grow tax-deferred until you reach retirement. Once you start taking distributions from the account, you pay taxes on the amount withdrawn.

The difference between the two Thrift Savings Plans shows up when it comes to matching your contributions. For government civilian employees, Uncle Sam matches up to 5% of the base pay (on a sliding scale) that a worker contributes to his or her Thrift Savings Plan account. Except under rare circumstances (matching has been used as a recruitment bonus), this option is not available to members of the military plan.

Roth IRA vs. TSP: Which Is Better for You

While both the Thrift Savings Plan and Roth IRAs are excellent retirement-savings vehicles, they have different characteristics and benefits. Here’s a comparison.

Like a 401(k), the federal Thrift Savings Plan requires you to pay taxes on your contributions and earnings when they are withdrawn during retirement.

By contrast, a Roth IRA allows investors to withdraw their contributions and earnings in retirement tax-free, after they reach 59½ years of age, as long as the account has existed for five years. This is because Roth IRA investors do not get a tax break when they fund the account; their contributions are made with after-tax dollars. (There are income limitations for qualifying for a Roth, so make sure you qualify.)

On the other hand, the Thrift Savings Plan (TSP) also offers an after-tax Roth option similar to a Roth 401(k). You pay taxes on your contributions as you make them, and your earnings are tax-free at withdrawal as long as you meet certain IRS requirements. It has the same contribution limits as the regular Thrift Savings Plan.

So the overall question is: Roth vs. non-Roth. When do you want to pay your taxes—when you invest (Roth) or when you withdraw your money (non-Roth)? In which stage of life are you likely to be in a higher tax bracket? Many investors are in a low income tax bracket early in their careers, when they start saving (or should start saving!) for retirement. For those investors, the upfront reduction in taxable income they get with a regular TSP might not benefit them all that much. Also, if your money stays in the savings plan for years, it will be very beneficial to be able to withdraw all those earnings tax free years down the road.

But there’s one more important question to ask before you decide: Do I qualify for matching funds? If you are a civilian employee and qualify, you should contribute at least up to the federal match first because you earn 100 percent on matched money. After that, it may make sense to contribute up to the limit to a Roth IRA, in order to gain its tax savings. (IRA contribution limits for 2017 are $5,500, plus an additional $1,000 catch-up contribution for the 50-plus group.) Even if you choose a Roth TSP instead of the regular form, you might still want to add a Roth IRA because Roth IRAs have one other benefit: no required minimum distributions (RMDs) at age 70½.

Say, you are a member of the Armed Forces and do not earn matching contributions for the amount you contribute. In that case, it could be more beneficial to invest in a Roth IRA first for its excellent tax benefits and freedom from RMDs later in life. Then, if you have additional money left to contribute, consider either a regular or Roth TSP contribution, depending on whether you want a tax deduction now or later. The tax savings of a Roth IRA make it an excellent choice for your retirement funds, especially the first portion of your disposable income, when compared with the federal government’s Thrift Savings Plan.

In short, there are several options. So take your taxes and your income—both current and projected—into consideration when deciding to which vehicle you will entrust your retirement savings.


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