Traditional TSP vs. ROTH TSP: What's the Difference and Which is Better?
Feb 04, 2015
You've probably heard of TSP, but given that only around 40% of service members actually use it, there's a decent chance you may not be taking advantage of this retirement investment opportunity, so here's a rundown.
(Photo: Sgt. Sean Callahan/Army)
What is TSP?
TSP stands for Thrift Savings Plan, and is similar to a 401k retirement program at a civilian company. The difference is that the government gives you a set of investment options to choose from, and because the government has so many employees, the fees you pay on those investments are significantly lower than what you'll have to pay elsewhere. While government civilians are eligible for a 5% "employer match" from the government, military service members are not eligible for any matching contributions. All TSP options require you to wait until age 59 1/2 to start withdrawing funds from your account.
Is TSP an investment?
No, TSP is just a retirement investment vehicle, or bucket holding your investments. You get to choose (from the available options) the investments that you will hold within your TSP account. TSP offers many options, from government bonds to small cap stocks, and everything in-between. I'll discuss some of the TSP investment options in a follow-up post to help you decide.
How much can I contribute?
For 2015, military service members (and government civilians) can contribute up to $18,000 annually. There are also some special circumstances for investing tax-exempt pay (like Hazardous Duty Pay). For more details on contribution limits, visit [2015 TSP Contribution Limits website] (https://www.tsp.gov/planparticipation/eligibility/contributionLimits.shtml "Thrift Savings Plan Contribution Limits 2015").
What is the new ROTH TSP and why should I care?
The ROTH TSP was introduced in 2012, and offers another option for service members and government employees to allow their after-tax money to grow and be withdrawn in retirement without paying any taxes.
What is the difference between ROTH TSP and Traditional TSP?
ROTH TSP: Pay normal taxes now, zero taxes while account grows, and zero taxes when you withdraw.
Traditional TSP: Pay less in taxes now, zero taxes while account grows, and lots of taxes when you withdraw.
Which is better, ROTH TSP or Traditional TSP?
In my opinion, ROTH TSP makes more sense than Traditional TSP for two mainly psychological reasons:
- I already count on paying taxes on my current income, so I don't feel a loss from paying taxes now.
- When I look at my investment account statement, I want the number I see to be the actual amount of money I'll be able to withdraw. With a Traditional TSP, you have to mentally reduce that number by the percentage of tax you'll pay when you withdraw.
To be clear, Traditional TSP can make sense for some people (especially those with higher income). And there is usually not an enormous difference between the two options when all is said and done. But for the reasons mentioned above, I prefer the ROTH TSP, especially for junior enlisted and those who have relatively low income.
Regardless of which option you choose, TSP is a fantastic program at much lower cost than "traditional" investing, and provides an easy way to automatically invest money for retirement without having to consciously think about it. So if you are part of the 60% who has not set up a TSP account, even if you start with $100/month contribution, it's a great way to start saving for retirement.
I'm not a financial professional, so if you have specific investment-related questions please seek advice from a financial advisor. For more information on both types of TSPs, visit the [TSP website] (https://www.tsp.gov/planparticipation/planParticipation.shtml "Thrift Savings Plan TSP Plan Participation").