How to Make the Traditional vs. Roth TSP Decision (2024)

24 Aug How to Make the Traditional vs. Roth TSP Decision

There’s no better time to start saving for retirement than right now. And for U.S. service members the best way to do that is with the Thrift Savings Plan (TSP). But before you can even start, you have to decide between the Traditional vs. Roth TSP account.

For most, the Roth TSP is the better choice because currently, you’re in a lower tax bracket than you’ll be in the future. With a Roth, your earnings and withdraws are tax-free because you contribute after-tax money, meaning you pay taxes upfront. So you won’t have to pay taxes when you withdraw your money after 59 1/2 years old.

In the Traditional TSP, the money you contribute is pre-tax. This means you don’t pay taxes at the time you put the money in instead you’ll pay taxes when you withdraw the funds. At that time your current tax bracket could be higher than it currently is, which is why the Roth TSP is better. That said, check with an accountant or financial planner to decide if the Roth version is the best for you. Here’s more about the decision on Roth vs. Traditional TSP.

What is the Thrift Savings Plan?

The TSP is a savings and investment account that allows service members and Federal employees to save for retirement. It’s the Department of Defense’s (DoD) version of a 401(k). The TSP is a defined contribution plan. That means the money available at retirement depends on the contributions and earnings you make while it’s invested. You receive a tax advantage by saving money in the TSP because the government wants you to save for retirement. The tax advantage depends on the tax treatment you select, Roth or Traditional.

What’s the Difference Between a Traditional vs. Roth TSP?

The main difference between a Roth TSP and a Traditional TSP is the way they are treated for taxes.

Is a Roth TSP Worth it?

As mentioned above, the Roth version is after-tax. In this account, you’ll pay taxes on your earnings before your contribution is saved into your TSP. You will pay the taxes before saving. At the time you begin withdrawing your money (59 ½ years old or later) you won’t pay taxes on the money you withdraw.

What is the Traditional TSP?

In the Traditional TSP, the money you contribute is pre-tax, which means you’ll make your TSP contribution before your income is taxed. When you withdraw your money, you’ll pay taxes on your contributions and earnings at your current tax bracket.

Income Limits for TSP

There are no income limits with the Roth or Traditional TSP.

Related reading: Best Uses of the G Fund for Service Members

2021 Contribution Limits

Contribution limits determine how much money you can save in your TSP within a calendar year. The 2021 contribution limits for the TSP are:

• Elective Deferral Limit is $19,500
• Catch-up Contribution Limit is $6,500
• Annual Addition Limit is $58,000

What is an Elective Deferral Limit?

The Elective Deferral Limit is the total amount a service member can save in their TSP account in a year. The combined total of a Traditional and Roth TSP may not exceed the deferral limit for the calendar year. For example, if you give $15,000 in 2021 to your Roth TSP, you cannot give more than $4,500 to your Traditional TSP in 2021. Catch-up contributions, rollovers, the DoD’s matching, or 1% automatic contributions (if you’re in the BRS) are not included in the calculation of the limit.

What is a Catch-up Contribution Limit?

The Catch-up Contribution allows participants over the age of 50 to “catch-up” by saving more than allowed under the Elective Deferral Limit. The catch-up savings enables you to contribute to both a Traditional and Roth TSP. Though, it may not exceed the yearly Catch-up Contribution Limit ($6,500 for 2021).

What is an Annual Addition Limit?

The Annual Addition Limit is the total contributions allowed to the TSP in a calendar year. The most you can give is either 100% of your income or the limit for the year. For example, if you make $40,000 in 2021, but the Annual Addition Limit is $57,000, you can only contribute $40,000 into your account. Catch-up contributions do not count towards the Annual Addition Limit. Here are the contributions they include:

• Elective deferrals (your contributions to the TSP)
• Employer matching contributions (DoD contributions to your TSP)
• Employer nonelective contributions (1% DoD automatic contributions)
• Allocations of forfeitures (money forfeited by members leaving service before the 2-year vesting rule is met)

Can I Contribute to a Roth and Traditional TSP at The Same Time?

Yes, you are allowed to contribute to a Roth and Traditional TSP at the same time as long as you do not exceed the elective deferral limit ($19,500 for 2021).

Does The TSP Have Matching Contributions?

The answer is yes and no! It depends on which retirement system you’re in, the Blended Retirement System (BRS) or the Legacy Retirement System. Under the BRS, the DoD matches up to 5% of your TSP contributions. The DoD matching contribution is a 1% automatic contribution (you get this even if you do not contribute to the TSP under the BRS) and a 4% matching contribution. Service members in the Legacy System are not eligible for matching contributions from the DoD.

What is Matching?

Matching is a dollar amount the DoD deposits into your Traditional TSP based on the contributions you make. These contributions are separate from your regular income. For example, if you save 3% in your Roth TSP, the DoD will put in a 1% automatic contribution and a 2% matching contribution.

An important note to remember is that the DoD deposits their matching contributions into a Traditional TSP accountant.

How to Start Using the TSP

Now that you have weighed and made your decision on the Traditional vs. Roth TSP, it’s time to get your TSP set up to start saving money. Here are the steps for getting started.

Starting the TSP Under the Legacy Retirement System

To establish your TSP account, you’ll need to begin in MyPay. Select TSP from the menu.

• Decide your contribution election: base, special, bonus, and incentive pay. This selection will determine all the pay you would like to save in the TSP. If you select bonuses, don’t forget about that selection when you receive the money. Often people forget about their election and are disappointed when they receive less than expected.
• Choose your tax treatment/account type: Traditional vs. Roth TSP. Here you will select which type of TSP you would like.
• Decide what percentage of your base, special, bonus, and incentive pay to contribute. How much would you like to save for retirement? See below for a calculator that can help with this decision.

Starting the TSP Under the BRS

Under the BRS, you’re signed up for the BRS once you have served 60 days in the military. Once you reach the 60 days, 3% of your base pay is deposited into your Traditional TSP account. Your funds will be invested in the Lifecycle fund closest to your 62nd birthday. If you would like to increase your savings to 5% to receive the full match from the DoD you need to do so through MyPay.

Also, if you would like to have your contributions go into a Roth TSP account, you’ll need to set that up through MyPay. Changing your invested money out of the Lifecycle Fund.

Traditional vs. Roth TSP Calculators

The TSP.gov website has the following eight calculators to help plan your TSP savings. Using a calculator can help reduce guesstimates and give you a better picture of future retirement savings.

• How Much Should I Save?
• How Much Will My Savings Grow?
• How Much Can I Contribute?
• Paycheck Estimator
• Contribution Comparison Calculator
• Retirement Income Calculator
• TSP Monthly Payment Calculator
• Estimate Loan Payments

Here’s the Bottom Line

When you’re deciding between the Traditional vs. Roth TSP you have to do what works best for your current situation. For many, the Roth TSP is the better choice because often, you’re in a lower tax bracket. What’s most important is that you start saving for your retirement as soon as possible.

If you want to “kickstart” your finances in the military, you can get access to my free Financial Kickstart Kit here.