Many federal employees are familiar with the tax advantages associated with the Roth Thrift Savings Plan (TSP) account. Contributions to the Roth TSP are made with after-taxed dollars (deducted from an employee’s after-taxed salary) and overtime potentially grow income tax-free. Roth TSP account earnings also potentially grow overtime and can be withdrawn tax-free after age 59.5 assuming that a five-year holding period has been satisfied.
A recent survey by the Plan Sponsor Council of America showed that 93 percent of 401(k) qualified retirement plans offer employees the option of making Roth 401(k) salary deferrals. The TSP has been offering the Roth TSP option to federal employees since 2012.
Suppose a federal employee does not have the funds to contribute for the year 2025 the maximum possible to both his or her Roth TSP account and to his or her Roth IRA account. The 2025 TSP contribution limits are $23,500 for federal employees younger than 50 during 2025; $31,000 for federal employees between age 50 and 59 and over age 63 during 2025; and $34,750 for federal employees aged 60, 61, 62 and 63 during 2025. The Roth IRA contribution limits are $7,000 for employees younger than 50 during 2025 and $8,000 for employees over age 49 during 2025. Which type of Roth account should the employee maximize? As explained, it turns out that each Roth option has its advantages and disadvantages.
The following are Roth IRA advantages:
- Roth IRAs offer a wider range of investment choices. Roth TSP investment choices are somewhat limited with five core funds (the C, S, I, F and G funds), the Life Cycle funds, and the mutual fund window. The Roth IRA on the other hand offers a broader range of choices for investing Roth IRA contributions, including individual bonds, individual stocks, open-ended funds, closed-ended funds, exchange-traded funds, and REITS.
- Roth IRA contributions are available for withdrawal without penalty and with no tax liability, even for those employees younger than age 59.5. Roth IRA contributions can be withdrawn income-tax and penalty-free at any age. Earnings are still subject to penalties if the distribution is prior to 59.5, doesn't meet the five-year rule or an exception.
- The rules for determining whether a Roth account distribution is a “qualified” distribution (that is, whether the earnings come out tax-free) is easier to satisfy for a Roth IRA account than for a Roth TSP account. For Roth IRAs, the five-year holding period begins January 1 of the year of the first contribution to a Roth IRA or January 1 of the year of the first conversion of a traditional IRA to a Roth IRA . For the Roth TSP, the five-year period begins on January 1 of the year of the first contribution made to the Roth TSP. Before entering federal service, if a federal employee or retiree had participated in a Roth qualified retirement plan (Roth 401(k), Roth 403(b) or Roth 457) then the five-year period begins with the year the employee or retiree made his or her Roth contribution to that particular Roth qualified retirement plan. A participant in a Roth qualified retirement plan has to satisfy a separate holding five-year period in order to make a tax-free and penalty-free “qualified” distribution.
- Roth IRA distributions that do not meet the conditions for a “qualified distribution” are subject to favorable “ordering” rules. These favorable “ordering rules” allow the Roth IRA owner to withdraw first from the already-taxed contributions and converted traditional IRA contributions before any of the taxable accrued earnings. With the Roth TSP, any distribution that is not qualified must meet a “pro-rata” rule that causes a part of the distribution to be taxable.
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The Roth TSP may be more advantageous for the following reasons:
- The Roth TSP may offer a Roth TSP participant more protection from creditors than Roth IRAs. This is true if the Roth TSP participant is the subject of a lawsuit. By contrast, Roth IRAs potentially give a Roth IRA owner creditor protection in the state where the Roth IRA owner lives. State law can provide less protection from creditors compared to what the Roth TSP provides.
- The Roth TSP is low cost. Roth TSP participants are not subject to commission charges and the administrative fees associated with the TSP are one of the lowest in the investment industry. The same cannot be said of the Roth IRA. Roth IRA owners typically pay an annual IRA custodial fee. Depending on how a Roth IRA is invested, the administration fees can be large. The result is that the potential investment growth of a Roth IRA account is diminished.
- The Roth TSP allows a Roth TSP participant to borrow against his or her Roth TSP employee contributions. Roth IRA owners are not allowed to take out loans against their Roth IRA account.
- Unlike Roth IRA contributions, Roth TSP contributions are not subject to annual income limitations. For example, a single federal employee whose 2025 modified adjusted gross income exceeds $165,000 is not allowed to contribute to a Roth IRA. A married federal employee who files jointly with his or her spouse, and whose modified adjusted gross income exceeds $246,000 is not allowed to contribute to a Roth TSP. A married federal employee or a single federal employee is always allowed to contribute to the Roth TSP, no matter the amount of their modified adjusted gross income.
- A traditional IRA owner is always allowed to convert a traditional IRA to a Roth IRA. It makes no difference with respect to the traditional IRA owner’s tax filing status – single, head of household, married filing jointly, or married filing separately, nor the amount of the traditional IRA owner’s modified adjusted gross income, a traditional IRA owner is always permitted to convert a traditional IRA to a Roth IRA. Until now, a traditional TSP participant has not been allowed to convert any portion of their traditional TSP account to the Roth TSP account. This will change starting after December 31, 2025. This opportunity to convert traditional TSP to Roth TSP is one of the provisions passed as part of the SECURE Act 2.0.
The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.