If you opted out of the Roth TSP because you thought you’d be in a lower tax bracket during retirement, it might be worth reevaluating your decision. Your federal retirement income, which includes your monthly FERS pension, Social Security, and traditional TSP distributions, is all subject to income taxes.
Furthermore, if your spouse has a 401(k) and you have other investments, you might find yourself in the same or an even higher tax bracket during retirement. Therefore, it could be beneficial to give the Roth TSP another look.
Tax-Free Withdrawals from the Roth TSP
When you contribute to a Roth TSP, you’re using after-tax dollars, meaning you pay taxes upfront based on your current tax rate. This results in tax-free withdrawals during retirement. With the Trump Tax Cuts expiring in 2025 and the RMD age increasing to 75 in 2033, the taxes on your traditional TSP withdrawals might be higher than expected.
Benefits of the Roth TSP Compared to a Roth IRA
A major advantage of the Roth TSP is the employer match, which isn’t available with a Roth IRA. This match, however, is taxable and added to your traditional TSP balance. Unlike Roth IRAs, the Roth TSP does not have an income limit for contributions, and its fees are generally lower than those associated with Roth IRAs.
Using the Roth TSP as a Tax-Free Emergency Fund
Having an emergency fund is crucial for retirees to manage unexpected expenses. If you withdraw from your traditional TSP for emergencies, you will owe taxes, potentially increasing your tax bracket. Withdrawals from your Roth TSP, however, are tax-free on contributions and qualified earnings.
No RMDs for the Roth TSP Due to SECURE Act 2.0
Effective January 1, 2024, federal retirees no longer need to take RMDs from their Roth TSP accounts. This change, in line with the tax-free nature of Roth accounts, allows your Roth TSP to grow indefinitely, providing a tax-efficient inheritance for your beneficiaries.
Consider connecting with an FRC® trained advisor to learn more about integrating the Roth TSP into your retirement planning strategy.
