TRANSCRIPT:
Matt: Now, one of the things that TSP came out with years ago was the Traditional and the Roth. So Jeremy, if you'll go over a little bit of the difference in the two.
Jeremy: Sure. The TSP Traditional option is a pre-tax option. What that means is it lowers your current taxable income bracket– or taxable income, excuse me. The agency matching contributions are automatically added to the Traditional side. What do I mean by that? Well, like we've just stated, you have a Traditional and a Roth, but if all you would ever do would be the Roth account, because that's what you want to do based on certain scenarios, the matching always go into the Traditional side. So you could have in a sense, two TSP balances.
The contributions on the Traditional side, they do grow tax deferred. Like I said, they were pre-tax which ultimately means upon withdrawal when you go to take the money out, everything that you've put in and everything that it's grown to (so both of those) are all taxable to you. Everything you take out of it is taxable to you when you make those withdrawals.
Moving to the Roth option, this first became available in May of 2012. You actually, there's not an automatic option to it. The traditional side is what your money's automatically put into if you make those TSP elections. You must submit a form, a contribution election form, to actually create the TSP Roth option. Like I said, it's the after tax portion of the TSP, which means money's going in after tax, so upon withdrawal, eligible withdrawals after 59 1/2, everything that you've put in (so all the contributions and what it's grown to) are all tax free. So that's a tremendous benefit. One of the quirks to this, though, is you have to sort of plan this out and make sure you're in the plan for at least five years in order to take advantage of that tax free income.
So what do they look like side by side? Which one should I do? That's the question that a lot of employees ask us, is should I do the Traditional or should I do the Roth? Well, there's no easy answer and it really depends on the individual, depends on tax rates, depends on a number of different things. But the employees are allowed to make contributions into both of the accounts simultaneously, so that's important. So you could do partial amount into the Roth, partial amount into the Traditional, remember those matchings are going into the Traditional anyway. The funds are separated for tax purposes so when you got to make a withdrawal, you have to make equal amount withdrawals out of each account.
The Roth, just kind of in a nutshell, again that's taxed now, so to get the same effect of a dollar amount, more money's gonna be taken out of your paycheck based on your individual tax bracket to actually get to the same net amount going into your TSP. But you do have those tax benefits later. On the Traditional side, tax deferred growth, it does reduce your current tax liability, but the contributions and the growth are all taxable when you withdraw. So just kind of a recap there.
One, you have tax benefits now, which is on the Traditional side and the other, you have great tax benefits later. So making a choice, you have to determine things like, well what is my income now? What is my tax bracket today versus what it may be when I retire? But it's such an individualistic type thing, you have to look at your scenario now, what you believe tax rates are gonna go to, but we're more than happy to sit down with each individual one on one and come up with an actual plan. But for me, what I recommend to most people is, take advantage of both of 'em.
Matt: Yeah.
Jeremy: Because if you don't know which one to go with today, do 'em both; 'cause it's nice to have two buckets, a taxable bucket and a tax free bucket when you get into retirement. That way you're covering both bases.
United Benefits has assisted thousands of federal employees on several impactful topics. We can help you, too. Ask us anything!
Click here to request a consultation and talk one-on-one with a representative about the options available to you.
