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Roth TSP vs. Roth IRA: How Do They Compare? 

You’ve probably heard before that you should be saving for retirement. But with so many different types of accounts to choose from, it can be overwhelming even to get started. And the decision becomes even more overwhelming when you have multiple types of accounts available to you.

In this article, we’re comparing two different types of retirement accounts — the Thrift Savings Plan and the individual retirement account. While the two have some things in common, they have different features, requirements, and benefits.

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Defining Each Plan Type

What is a Roth TSP?

A Thrift Savings Plan (TSP) is a workplace retirement plan available to military and federal government employees. Think of it as the federal government’s version of the 401(k) plans that most for-profit companies offer their employees.

Using a TSP, federal government employees can save for retirement in a tax-advantaged way. Like other popular retirement plans, TSP participants have the option of both traditional and Roth contributions, meaning they can choose the tax advantage they want.

All federal government employees are eligible to contribute to a TSP. And unlike some workplace retirement plans, there is no waiting period or vesting period.

What is a Roth IRA?

An individual retirement account (IRA) is a type of retirement account that someone opens on their own directly with a brokerage firm rather than through their employer.

Like TSPs and other retirement accounts, participants have the option of either traditional or Roth contributions, each of which has its own tax advantages. However, in addition to the eligibility requirements to contribute to an IRA, there are stricter requirements imposed on Roth IRAs.

To contribute to an IRA, you must have earned income during the year you contribute. Additionally, you can only contribute up to the lesser of 100% of your annual income or the annual contribution limit.

For a Roth IRA specifically, you must have an annual income under a certain level to contribute. You must have an income of less than $129,000 if you’re a single filer or $204,000 if you’re a married filer to contribute the full amount. After that, your allowed contributions begin to phase out. Once your income reaches $144,000 for single filers and $214,000 for married filers, you won’t be allowed to contribute at all.

Note: Traditional IRAs don’t have an income limit to contribute to the account, but they do have an income limit to deduct your contributions if you also have a retirement plan through your employer.

Similarities Between a Roth IRA and a Roth TSP

Before we dive into the differences between a Roth TSP and a Roth IRA, let’s talk about their similarities.

First, as we mentioned, both TSPs and IRAs have the option of either traditional or Roth contributions. This article is specifically comparing Roth accounts, but it’s helpful to understand how both types of contributions work.

When you make traditional contributions to a TSP or IRA, you’re able to deduct those contributions from your taxable income for the year. In the case of TSP contributions, the money will come out of your paycheck before taxes are applied. And in the case of a traditional IRA, you’ll be able to claim a tax deduction when you file your income tax return the following year.

Once you’ve contributed to your traditional TSP or IRA, the money grows tax-deferred in the account. You won’t pay taxes on it again until you take withdrawals during retirement. At that point, your distributions will be subject to income taxes.

Roth contributions to a TSP or IRA work exactly the opposite as traditional ones. The money you contribute to these accounts has already been taxed, meaning it doesn’t reduce your taxable income for the year. But then you’ll never pay taxes on those funds again, either while they’re in the account or when you take distributions during retirement.

The other important similarity that a Roth IRA and Roth TSP share is that both are intended for retirement purposes. As a result, the IRS prevents you from taking money out of the account before you reach 59½. There may be some exceptions, such as financial hardship. But generally speaking, any withdrawals before the minimum age will result in a 10% early withdrawal penalty tax.

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

We’ve already established that Roth TSPs and Roth IRAs have a few important things in common. But the two types of accounts have far more differences than they have similarities.

Plan Type

The first major difference between a TSP and an IRA is the type of plan they are. As we mentioned, TSPs are employer-sponsored retirement plans available to federal government employees. As a result, you must be a federal government employee to participate.

An IRA, on the other hand, is an individual account. Anyone with earned income can open and contribute to an IRA through a brokerage firm of their choice.

Contribution Limits

The contribution limits for TSPs are the same as the limits for other workplace retirement plans. In 2022, you can defer up to $20,500 into this type of account. If you’re 50 or older, you can contribute an additional $6,500 for a total employee contribution limit of $27,000.

Not only can you contribute to a TSP as a federal employee, but your contributions are automatic. Employees who began their service between August 1, 2010 and September 30, 2020 will automatically have 3% of their salary deferred into their TSP. For employees hired on or after October 1, 2020, the automatic contribution amount is 5% of their salary.

The contribution limits for IRAs are considerably lower. In 2022, the IRS only allows workers to defer up to $6,000 of their income to an IRA. Like TSPs, IRAs also allow a catch-up contribution for older workers. However, the IRA catch-up contribution limit is only $1,000.

Unlike TSPs, IRAs have no automatic contributions. Instead, you’ll have to deposit money into the account actively. Many people use a monthly automatic transfer into the account to ensure they’re actively investing for retirement.

Employer Contributions

One of the major benefits of a TSP is that participants are eligible for employer contributions. First, employees will automatically receive 1% of their salary into their TSP as an employer contribution. This contribution isn’t a matching one, meaning you’ll get it even if you don’t contribute to your TSP account.

In addition to the automatic 1% contribution, TSP participants will also receive a matching contribution of up to 5% of their pay. Any amount you contribute up to 5% of your salary, your employer will match it.

It’s important to note that the matching contribution includes the automatic 1% contribution. For example, if you contribute 5% of your salary to your TSP account, your employer will contribute a total of 5% — 1% for the automatic contribution and an additional 4% for the matching contribution.

The story is quite different for IRAs. Because these are individual plans, there is no employee to make contributions on your behalf. As a result, the only money going into the account will be the money you contribute personally.

Investments

Another important difference between a TSP and an IRA is the investment options available. Like other workplace retirement plans, TSPs generally come with a limited menu of investment options selected by the employer (in this case, the federal government).

First, TSP participants can choose from five different fund options, named the G Fund, F Fund, C Fund, S, Fund, and I Fund. These individual funds generally offer participants the option of investing in short-term U.S. securities or index funds made up of domestic and international stocks.

The other option for TSP investors is lifecycle funds, which are similar to the target-date funds you would find in any other retirement plan. These lifecycle funds are a diversified mix of the five individual funds, which lets you build a diverse investment portfolio with a single investment. The fund automatically adjusts its risk as you near retirement.

The investment options are where IRAs really shine. Unlike workplace retirement plans, IRAs have few limits on what you can invest in. Generally speaking, you can invest in any asset your brokerage firm offers, including individual stocks and bonds, mutual funds, exchange-traded funds (ETFs), and more.

Loans

Another difference between TSPs and IRAs that some investors may find important is their ability to offer loans. Like 401(k) plans, TSPs can offer loans to their participants.

You can take a general purpose loan, which can be spent on anything and must be repaid within five years. You can also borrow a residential loan, which must be used to build or buy a primary residence. With this type of loan, you can take 15 years to pay it off.

It’s important to note TSP loans can only be made with your contributions. Your employer’s contributions, including both the automatic and matching contributions, aren’t eligible for loans.

IRAs, on the other hand, don’t offer any type of loan. Any distribution from the account is considered a permanent one and will be subject to any tax consequences that apply, including the 10% early withdrawal penalty.

Required Minimum Distributions (RMDs)

A final important difference between Roth TSPs and Roth IRAs is whether they are subject to required minimum distributions (RMDs). The IRS imposes RMDs on most tax-advantaged retirement plans. You’ll have to start withdrawing a minimum amount starting in the year you turn 72. Failing to take your RMDs could result in a financial penalty.

Traditional IRAs are subject to RMDs, but Roth IRAs aren’t. If you have a Roth IRA, you can leave the money in the account for as long as you want, either to fund your later retirement years or to pass it along to your heirs. The IRA is the only type of account where Roth contributions aren’t subject to RMDs.

Is Roth IRA or Roth TSP Better For You?

Both Roth TSPs and Roth IRAs come with some major benefits but also some downsides. As for TSPs, you have the benefit of high contribution limits, as well as automatic and matching contributions from your employer. However, disadvantages include a limited investment selection and the requirement for RMDs at age 72, even for Roth contributions.

On the other hand, Roth IRAs have considerably lower contribution limits. Additionally, because of the income limits, not everyone can contribute. Finally, because it’s an individual plan, there’s no chance for employer contributions.

Note: Even if you can’t contribute directly to a Roth IRA, there is still a workaround. You can do what’s called a backdoor Roth IRA by first contributing to a traditional IRA and then converting those funds to Roth contributions.

But Roth IRAs also have some major advantages. First, they offer a far greater selection of investment options. Essentially any investment your brokerage firm offers, you can invest in through your Roth IRA. Additionally, Roth IRAs don’t have RMDs, making them a useful estate planning tool.

Can I Contribute to TSP and Roth IRA?

If you’re having a difficult time choosing between your TSP and a Roth IRA, we’ve got good news: you don’t have to choose. As long as you meet the requirements for both types of plans, you can contribute to both.

There are many ways to balance both TSP and IRA contributions, but here’s what many people choose to do:

Start by contributing to your TSP up to your full employer contribution. In the case of a TSP, you would contribute 5% — enough to get your automatic contribution and your full employer match.
Once you’ve contributed enough to your TSP to get your full employer match, begin contributing to your Roth IRA.
Remember, Roth IRAs have lower contribution limits. So if you max out your Roth IRA, you can switch back to contributing to your Roth TSP, either until you max it out or you contribute as much as you’re financially able.

Of course, you also aren’t limited to contributing to only Roth accounts. Both TSPs and IRAs have the option for traditional contributions. You could choose those if they offer a better tax strategy for you. You can also take advantage of both tax benefits by contributing some money to a traditional account and some to a Roth account.

Our Take

Both Roth TSPs and Roth IRAs are popular investment accounts. Roth TSPs are available to federal employees, while Roth IRAs are available to everyone with earned income under the limits set by the IRS.

But remember that choosing the right retirement account is only one piece of the puzzle. You can also turn to the Personal Capital Retirement Planner to help you reach your retirement goals. This planner will help ensure you’re on track to meet your retirement goals, as well as tell you how much you’ll need to contribute each month to retire on time and with enough money.

Get Started with Personal Capital

 

 

Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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