Throwback Thursday Classic Post – Step 5 to Crush the TSP – Roth vs Traditional

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We’ve talked about steps 1-4 to crush the Thrift Savings Plan (TSP). Now we’re on to step 5, deciding between the Roth vs traditional TSP. Let’s take a look at the difference between the two and help you to decide which is the right choice for you.

The Traditional TSP

The traditional TSP is the first of two potential tax treatments for your TSP contributions. If you elect it, you defer paying taxes on your contributions and their earnings until you withdraw them. This is the only option for any money you get as a result of the 5% government match in the new Blended Retirement System (BRS).

If you are in a combat zone making tax-free contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.

The Roth TSP

The Roth TSP is the second of two potential tax treatments for your TSP contributions. If you contribute to it, you pay taxes on your contributions now and your earnings are tax-free at withdrawal.

The Roth TSP is similar to a Roth 401(k) that a civilian would have, not a Roth IRA. There are no income limits for Roth TSP contributions. You can contribute to both your Roth TSP and a Roth IRA without contributions to one affecting how much you can contribute to the other. For example, in 2019 you can contribute the full $19,000 to your Roth TSP and $6,000 to your Roth IRA.

Which One is Best for You?

Here’s a table that compares the two options from the TSP website:

The Treatment of… Traditional TSP Roth TSP
Contributions Pre-tax After-tax1
Your Paycheck Taxes are deferred*, so less money is taken out of your paycheck. Taxes are paid up front*, so more money comes out of your paycheck.
Transfers In Transfers allowed from eligible employer plans and traditional IRAs Transfers allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s
Transfers Out Transfers allowed to eligible employer plans, traditional IRAs, and Roth IRAs2 Transfers allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs3
Withdrawals Taxable when withdrawn Tax-free earnings if five years have passed since January 1 of the year you made your first Roth contribution, AND you are age 59½ or older, permanently disabled, or deceased

* If you are a member of the uniformed services receiving tax-exempt pay (i.e., pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt.
1. Roth contributions are subject to Federal (and, where applicable, state and local) income taxes, while traditional contributions are not taxed until withdrawn. However, both Roth contributions and traditional contributions are included in the amount of wages used to calculate payroll taxes (e.g., Social Security taxes).
2. You would have to pay taxes on any pre-tax amount transferred to a Roth IRA.
3. Transfers to a Roth IRA from a Roth TSP are not subject to the income restrictions that apply to Roth IRA contributions.

The issue of whether Roth is a good option for you was discussed in this TSP Highlights called Is Roth For You?

If you like interactive calculators, this one from Betterment is pretty good.

If you don’t trust anything I say and want to read what someone else thinks, I don’t blame you. Here’s a good article from Money.

The decision really boils down to whether you’d like to pay taxes now (Roth) or later (traditional) and how your current tax rate compares to your likely future tax rate during retirement. While predicting the future is not easy, if you are young or early in your career, your earnings and tax rate are likely to rise in the future, so you should probably lean toward the Roth option. If you are in your peak earning years and you expect your tax rate to fall in retirement, you should probably lean toward the traditional and defer taxes to a future date.

If you are not sure which option to choose, many people recommend you diversify your retirement accounts and simply split the Roth and traditional 50/50. That way in the future you’ll have options depending on how future tax rates and your financial situation changes.

What do I do? I can afford the taxes now and want as much tax-free money available to me as I can get, so I put all the money in the Roth TSP that I can. That said, the first part of my career I didn’t have a Roth option, so a large percentage of my TSP balance is in the traditional TSP as well, so I’m about 50/50 split between the two options.

Some Rules to Be Aware Of

The TSP keeps your traditional and Roth money in separate “buckets” in your TSP account.

You cannot convert any portion of your existing traditional TSP balance to a Roth balance.

You can make both traditional and Roth contributions if you want. You can contribute in any percentages or amounts you choose and can change your election at any time.

If you are getting government contributions (perhaps because you are in the Blended Retirement System), they are deposited into your traditional TSP. You can put your portion in the Roth, but the government’s portion must go in the traditional.

The Bottom Line

Use the resources above to decide if you want to invest in the traditional TSP, the Roth TSP, or some combination of the two. If you’re not sure what to do, I’d just split it 50/50 so you have options in the future.

Keep your eye out for the last step to crush the TSP, rebalancing.

4 thoughts on “Throwback Thursday Classic Post – Step 5 to Crush the TSP – Roth vs Traditional

    dwg said:
    January 8, 2022 at 13:47

    Curious if you’re still allocating 100% of TSP contributions to Roth given this post was (1) initially published prior to you putting on O6 and (2) I assume you’re a FIRE proponent (based on those Friday Finance articles). If you’re aiming for RE, your marginal tax rate must be higher now than it will be in retirement, correct? Has this pushed you to change your TSP contributions? With residency graduation and incentive pay on the horizon, I’ve been working through this calculus myself.


      Joel Schofer, MD, MBA, CPE responded:
      January 8, 2022 at 20:37

      I’m still 100% Roth. I use all the Roth space I can. I have plenty of traditional retirement contributions from the 1st half of my career where there was no Roth RSP. The way I look at it, I have no idea what my income will be in the future, nor tax rates. I can afford to pay the taxes now, so I pay them now.


    Nathan Johnson said:
    February 3, 2022 at 12:09

    Hey Joel, hope you’re well and enjoy your writing. Have you looked into ? They seem to have done well moving TSP assets around between funds based on market conditions. Recently they recommending moving money out of the S fund and into F before the January bear market.


      Joel Schofer, MD, MBA, CPE responded:
      February 3, 2022 at 17:41

      I have not checked them out, but what you are talking about sounds like active market timing, and both over the long haul will not pay off. It is your money, though!


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