Roth and traditional TSP contributions
A Choice of Tax Treatments
Your decision about Roth and traditional TSP is a choice of when you pay income tax on your TSP contributions and earnings. You can pay taxes either when you earn and contribute the money or when you withdraw it. There isn’t a set formula to determine which choice is best for everyone, and your decision may change as your income and needs change over time. Here are a few questions you’ll want to ask yourself to get started:
- Do I expect a higher or lower income tax rate in retirement?
- How much money do I need in my paycheck right now?
- Will my choice of tax treatment affect how much income tax I need to pay?
You can change your contribution type through your agency or service payroll system.
With Roth TSP, your contributions go into the TSP after tax withholding. That means you pay taxes on your contributions at your current income tax rate. The advantage of the Roth TSP is that you won’t pay taxes later when you withdraw your contributions and any qualified earnings. Withdrawals are considered qualified after both of these Internal Revenue Code (IRC) requirements are met: 5 years have passed since January 1 of the calendar year when you made your first Roth TSP contribution and you are at least age 59½, permanently disabled, or deceased. If you expect your tax rate to be higher when you make withdrawals, Roth TSP may be the better option.
With traditional TSP, your contributions go into the TSP before tax withholding. However, when you take money from your traditional TSP, you’ll pay taxes on both your contributions and earnings at the income tax rate of the year you make the withdrawal. If you expect your tax rate to be lower when you make withdrawals, traditional TSP may be the better option.
A mix of both Roth and traditional TSP
You may consider splitting your contributions between Roth and traditional TSP. Note that if you receive automatic or matching contributions from your agency or service, those contributions will always go into your traditional TSP balance and cannot be converted to Roth.
How loans and withdrawals affect your Roth and traditional balances
When you take a loan from your account or do an interfund transfer, the transaction will include a proportional amount from each balance (traditional and Roth). For example, if 80% of your account is in your traditional balance and 20% is in your Roth balance, then 80% of the amount you borrow or transfer to a different investment fund within your TSP account will be from your traditional balance and 20% will be from your Roth balance.
When you make withdrawals from your account, however, you can choose to withdraw from your traditional balance only, from your Roth balance only, or proportionally from both.
Contributing tax-exempt pay for serving in a combat zone (uniformed services only)
If you make Roth TSP contributions from tax-exempt pay, you never pay taxes on that money—not at the time you contribute it and not when you withdraw it. The earnings on those contributions are also tax-free if you meet the requirements for qualified Roth distributions. Note that tax-exempt contributions to Roth are subject to the IRS elective deferral limit.
If you make traditional TSP contributions from tax-exempt pay, those contributions will be kept separate from the rest of your traditional TSP money so that you won’t ever have to pay taxes on it. However, the earnings on those contributions will be taxed when you withdraw them, just like other traditional money.