When it’s time to retire from your federal government career, you’ll likely receive benefits through the Federal Employees Retirement System (FERS) thanks to its Basic Benefits, Social Security, and the Thrift Savings Plan (TSP) pillars.
Your TSP is funded by payroll contributions that grow over time with the help of compound interest. Furthermore, you have two TSP options: Traditional and Roth. Understanding how these plans operate can help ensure a well-funded retirement.
Roth TSP vs. Traditional TSP: Knowing the Differences
Roth and Traditional TSPs share some similarities. Specifically:
Here’s how these TSPs differ.
Traditional TSP: Taxable income reduction
Pre-tax dollars fund a Traditional TSP. In other words, you’re not taxed on contributions. This reduces your income, potentially lowering your taxes.
Other factors with the Traditional TSP are that:
A Traditional TSP could be a good option if you:
Roth TSP: Tax-free growth
One way the Roth TSP differs from its traditional cousin is that contributions come from after-tax dollars. You’re paying taxes upfront on what you put into the account.
Other differences include:
The Roth TSP could be a good option if you:
Combining to diversify
Another option is to invest in both TSPs. This involves splitting payments between your Roth and Traditional accounts. The benefits are that:
If you direct part of your salary to both TSPs, be aware that your employer’s matching payments are automatically deposited to your Traditional TSP, so the pre-tax balance will always be ahead. Also, the annual contribution limit remains the same for both accounts.
Choosing the Right Federal Employee Retirement Strategies
Both TSPs are available to provide resources for a successful retirement. When deciding which option to pursue, consider your career stage, income, financial needs, and post-job goals. Also, be aware of—and be prepared for—potential federal tax shifts.
To gain more clarity on your existing and future situations, reach out to the CERTIFIED FINANCIAL PLANNER™ professionals at Serving Those Who Serve. These fed-focused experts can assist you in building and maintaining a practical financial foundation. Additionally, the STWS website provides helpful insights on TPS and additional federal government benefits.
To set up your free consultation, email us at [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 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. **