Roth TSP is NOT a Roth IRA!

Elephants and mice share many characteristics. But as house guests they are very different…

Dairy cows and race horses have four legs, tails and are vegetarians. Yet in the Kentucky Derby, you don’t put your money on a Jersey cow.

By the same token, the Roth TSP now available to federal 401(k) plan investors is very, very different from a Roth IRA although they confusingly share a similar name. And it’s very important that feds understand the difference. It could make or break their retirement.

The giant federal-military 401(k) plan, the Thrift Savings Plan, is introducing a Roth option, for its 4.5 million-plus investors. The TSP, like other 401(k) plans, is a way to save on taxes. Money invested in the TSP is tax-deferred until you start withdrawing it. It is a good deal. Workers under the FERS retirement system (the vast majority of still-working feds) who invest at least 5 percent of their salary in the TSP get a 5 percent match from Uncle Sam. That’s the equivalent of a tax-deferred 5 percent pay raise.

FERS employees get the match (CSRS people don’t) because the FERS annuity formula is less generous than under the CSRS formula. Current FERS retirees, for example, get an average monthly annuity of $720. That’s about half of what the average new CSRS retiree gets. For CSRS employees, the TSP is a nice feature. For FERS employees (with their smaller civil service annuity) investing in the TSP is critical.

(Many private firms do not offer 401 plan options to their employees, and the vast majority of those that do don’t offer anything like a 5 percent match.)

The downside of the TSP is that when individuals begin withdrawing money, everything in their account is taxable. If future tax rates are lower than current levels (unlikely) that’s not so bad. But if taxes go up (as many predict) and your retirement income is less, well…

The Roth IRA is very different. Very.

Greg Long, the executive director of the Federal Retirement Thrift Investment Board, says the one thing he wants all federal/postal investors to understand is that “the Roth IRA and the Roth TSP are two very, very different things.” He said he wished they had different names, because they are different in two very important ways.

First, the regular TSP, like the Roth TSP, is funded via payroll deduction. The money going into a regular TSP account is tax deferred. As Long says, it’s a “pay me later” deal for Uncle Sam. The Roth TSP is totally different because it’s funded with after-tax money. In other words you pay the taxes on it before you invest. So when it comes out, it is all yours!

Secondly — and this is very important — there are no income limits on a Roth TSP. With a Roth IRA, if you make more than a certain amount ($183,000), you cannot contribute. But with the Roth TSP you can contribute after tax money. So you could have a regular TSP account and a Roth TSP account at the same time. The only limit is the IRS limit on the amount an individual can contribute in one year.

Long says he gets nervous when people fixate on the term “tax-free” with the Roth TSP. He said they need to study the option carefully and people “need to think long and hard” before choosing one option or the other.

How would you like a one-hour tutorial on the new Roth TSP as opposed to the Roth IRA? Easy. Yesterday’s For Your Benefit radio show zeroed in on the new option. In addition to Long, guests included Kim Weaver, director of external affairs and Laurissa Stokes, assistant general counsel of the FRTIB. They outlined the timetable for introduction of the new Roth TSP, and explain the differences, limits and tax breaks. It was a great show. You need to hear it, and pass it on to a friend.


By Jack Moore

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