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Roth IRA vs. Roth TSP: Which Is Right for Your Military Family?

When it comes to retirement strategies, military families have some unique savings options. Like many federal employees, they can use Thrift Savings Plans (TSPs). That said, many of the other retirement options and products are open to them as well, including the Individual Retirement Account (IRA).

In addition, there are tax-advantaged Roth versions of both of these options. With this in mind, the question becomes, which one is right for your family?

Roth IRA Overview

Since the Roth IRA was introduced in 1998, its popularity has soared. It has become a fixture in many retirement planning strategies because it offers savers several potential advantages.

The key argument for going Roth can be summed up in a sentence: Paying taxes on your retirement contributions today may be better than paying taxes on your retirement savings tomorrow.

Roth IRA contributions are made with after-tax dollars, and any potential earnings on investments within a Roth IRA are not subject to income tax or included in the account owner's income. Instead, they accumulate on a tax-deferred basis and are tax-free when withdrawn from the account if the distribution is qualified.1

You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are 59½ or older and have owned the account for at least five years. The IRS calls such tax-free withdrawals qualified distributions.1

Withdrawals don’t affect the taxation of Social Security benefits. If your provisional income is between $25,000 and $34,000 - or $32,000 and $44,000 for joint filers - then your Social Security benefits may be taxed if you take withdrawals before your full retirement age. Luckily, a qualified distribution from a Roth IRA doesn’t count as taxable income, which may be a means of avoiding taxation on your Social Security benefit.1,2

Roth IRA Considerations

Who can open a Roth IRA? Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2021, eligibility to contribute to a Roth IRA is phased out between $198,000 and $208,000 for married couples filing jointly and between $125,000 and $140,000 for single filers.1  

When considering a Roth IRA, you’ll want to keep the contribution limits in mind. The combined annual contribution limit to all of your traditional and Roth IRAs is $6,000 for 2021 ($7,000 if you're age 50 or older), but income limits may reduce your ability to contribute. It’s important to note that you can continue contributing to your Roth IRA throughout retirement, and there is no required minimum distribution.1

Roth TSP Overview

A thrift savings plan is a supplemental retirement savings plan meant to complement pension plans for federal workers and military personnel.

A traditional TSP is funded akin to a traditional 401(k) or 403(b). Pre-tax dollars are directed from your paycheck to fund the account, thereby reducing your taxable income. Put another way, you don’t pay tax on traditional TSP contributions or earnings until they are withdrawn. Contributions to a traditional TSP made by uniformed service members are tax-exempt and those contributions may be withdrawn tax-free, although earnings off of them will still be subject to tax.3

TSP Considerations

The handful of funds offered by the TSP pale in comparison to the variety of investments you can hold in an IRA. You can utilize a Roth TSP, however, just as you can with an IRA.

Unlike a Roth IRA, there are no income limits for contributing to a Roth TSP. You may contribute after-tax dollars in exchange for potential tax-free withdrawals during retirement. In fact, you can make both Roth and traditional contributions to a TSP per your contribution election. You can’t convert a traditional TSP balance to a Roth TSP balance, however.4

Similar to a 401(k), you may be permitted to take a loan from your TSP. As long as you work for the federal government or are in the uniformed services, you can take a loan and pay it back with interest (Note: you must be in pay status). General purpose loans have repayment terms of one to five years, residential loans (for home buying or home construction) repayment terms of one to fifteen years.5

While IRAs and TSPs have many functional differences, they have many similarities. Speak to your trusted financial professional about how a Roth IRA or Roth TSP might be of service to your retirement strategy.

  1. https://www.irs.gov/retirement-plans/traditional-and-roth-iras
  2. https://www.kiplinger.com/retirement/602231/how-10-types-of-retirement-income-get-taxed
  3. https://www.tsp.gov/tsp-basics/how-tsp-fits/
  4. https://www.tsp.gov/making-contributions/traditional-and-roth-contributions/
  5. https://www.tsp.gov/loan-basics/

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.