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Roth TSP and Roth IRA: Similar, But Different – Which One(s) is/are Right for Me?

January 29, 2025

Roth TSP and Roth IRA: Similar, But Different – Which One(s) is/are Right for Me?

By: Site Owner

Published: January 29, 2025

Author: John Jilek, CFP®

When planning for retirement, Federal employees can employ two popular options for tax-advantaged savings and tax-free withdrawals in retirement: the Roth portion of the Thrift Savings Plan (TSP) and the Roth IRA (Individual Retirement Account). While both offer tax-free growth and tax-free withdrawals in retirement, they have key differences that could make one more suitable for you. Let us explore these options, who they are best for, and how they compare.

Roth TSP vs. Roth IRA: What’s the Difference?

Roth TSP

The Roth TSP is an employer retirement savings plan available exclusively to Federal employees and members of the Uniformed Services. Contributions are made after tax, meaning you pay taxes on the money you contribute now, but your withdrawals in retirement will be tax-free, provided you meet the qualifications. The TSP offers a range of low-cost investment options, including funds that track U.S. stocks, bonds, and international equities.

  • Contribution limits: For 2025, the contribution limit is $23,500 for those under age 50, and $31,000 for those 50 and older ($23,500 regular deferral plus $7,500 for the catch-up contribution).
  • A new special higher catch-up limit for ages 60-63 starting in 2025 is $11,250.
  • There are NO INCOME LIMITATIONS on contributions to Roth TSP. Many Federal Employees I encounter still do not know this fact!
  • Employer Matching: If you contribute to the Roth TSP, your agency or service will still match your contributions up to a certain percentage, which is a significant benefit. However, these contributions will still be invested on a pre-tax basis in TSP.
  • There is no access to the funds in Roth TSP until the age of 59 ½. However, you could access TSP funds utilizing a TSP loan.

Roth IRA

A Roth IRA is a type of individual retirement account that can be opened by anyone with earned income, including Federal employees. Like the Roth TSP, Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free, if certain conditions are met.

  • Contribution Limits: For 2025, the contribution limit is $7,000 for those under 50, and $8,000 for those 50 and older.
  • Income Limits: Roth IRA contributions are subject to income limits, which can limit eligibility for high earners. This is where the Backdoor Roth concept comes into play. I will cover that opportunity at the end of this article.
  • No RMDs: Roth IRAs do not require withdrawals during your lifetime, allowing for more flexibility in your retirement strategy.
  • Roth IRAs have a much greater range of investment choices if held in a self-directed brokerage account.
  • Roth IRAs always allow you to access the principal you have contributed. This could be a factor if you need to access some of your money in an emergency prior to 59 ½. You cannot take a loan against Roth IRAs.

Do I Make Too Much to Contribute to Roth IRA?

Just to make it overly clear, for the Roth TSP, there are no income limits. You can contribute to the Roth TSP regardless of your income level. However, Roth IRAs are subject to income limits.

For 2025, if your modified adjusted gross income (MAGI) is:

  • Less than $150,000 single or $230,000 married filing jointly, you can contribute the full $7,000, or $8,000 if 50 or over.
  • If your income is between $150,000 and $165,000 single or $236,000 and $246,000 married filing jointly, you can make partial contributions.
  • Above these thresholds, you are ineligible to contribute to a Roth IRA.

If your income exceeds these limits, you won’t be able to contribute directly to a Roth IRA. However, there is a strategy known as the Backdoor Roth IRA that might still allow you to contribute.

Which One(s) Are Right for Me?

Choosing between a Roth TSP and a Roth IRA depends on several factors, including your income, retirement goals, and the number of years left before retirement.

  1. If you are a Federal employee, the Roth TSP offers the advantage of employer matching, which can significantly boost your retirement savings. The ability to contribute larger amounts compared to a Roth IRA is also appealing.
  2. If you already have a Roth TSP, you might still want to open a Roth IRA if you can. This allows you to take advantage of additional tax deferred tax-free savings and have pre-59 ½ access to your contributions in an emergency.
  3. If you are a high-income earner, a Roth IRA may be out of reach due to the income limits, but the Roth TSP remains available without income restrictions.
  4. Consider both if you have the capacity to save aggressively. By using both options, you can contribute the maximum allowable amounts to each, further boosting your retirement savings principal without penalty.

Is It Too Late for Me with Only a Handful of Years Before I Retire?

It’s never too late to start contributing to a Roth TSP or Roth IRA, even if you are nearing retirement. The benefits of compounding over decades are ideal for late contributions into any Roth account. The more you can fund these accounts before retirement, the more they will grow tax deferred and be tax free to you or your beneficiaries. I always ask people what type of wealth they would like to inherit. Taxable income or tax-free income. The answer is never taxable income. Even a small contribution can compound to an exceptionally large tax-free legacy to your beneficiaries.

What’s This Backdoor Roth Idea I Keep Hearing About?

The Backdoor Roth IRA is a strategy for high-income earners who exceed the income limits for Roth IRA contributions. It involves contributing to a Traditional IRA and then converting that IRA to a Roth IRA.

Here is how it works:

  1. Contribute to a Traditional IRA: There are no income limits for contributing to a Traditional IRA.
  2. File Form 8606 with the IRS informing them you have made a non-deductible contribution to your Traditional IRA.
  3. After the contribution has been made, convert the money from your Traditional IRA to a Roth IRA. Since you have already paid taxes on the contribution, the conversion can be done without paying extra tax unless there are earnings in the account. To avoid earnings, do not delay the conversion. Once the funds have cleared your Traditional IRA account, complete the conversion immediately.

This strategy can be particularly useful for those whose income exceeds the Roth IRA limits, allowing them to access the tax benefits of a Roth IRA, even though they wouldn’t normally be eligible.

Important Notes:

  • The conversion process can trigger taxes if you have Traditional IRAs with pre-tax funds.
  • Be cautious about the pro-rata rule, which will apply if you have other pre-tax IRA balances. These balances could be moved into an employer plan if allowed to avoid this issue.

Conclusion

Whether you choose a Roth TSP, Roth IRA, or both depends on your individual financial situation, goals, and eligibility. While the Roth TSP is a great option for Federal employees with larger contribution limits and matching funds, the Roth IRA offers more flexibility in investment choices and access prior to 59 ½. The Backdoor Roth IRA provides a workaround for high-income earners who might be phased out of eligibility.

In any case, contributing to a Roth account is a powerful strategy for tax-free growth in retirement. Even if you are nearing retirement, it’s never too late to start making Roth contributions or exploring options like the Backdoor Roth to maximize your retirement savings.

John Jilek has been a Financial Advisor since 2000, prior to this he was General Manager for Batching Systems, Inc. for 10 years. John has a BS in Education from the University of Maryland, College Park, and in 2009, completed the training to become a Certified Financial Planner™ by the Certified Financial Planning Board of Standards. John has been an active trainer in several fields for twenty-six years.  

This newsletter is designed to provide information on the subjects covered. NITP, Inc. takes great care to insure the accuracy and quality of these materials which are provided without any expressed or implied warranty, including, but not limited to, their fitness for a particular purpose. They are also provided with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, financial planning or other professional service. If additional assistance is required, the services of a competent professional should be sought.

This entry was posted in News on January 29, 2025 by Site Owner.

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