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Roth versus traditional TSP

  • Published
  • By Senior Airman Jette Carr
  • 27th Special Operations Wing Public Affairs
Due to the wide scope of the Thrift Savings Plan, the focus of this article has been narrowed down to how this program functions for active duty military members. To get more information on the TSP outside of these parameters, visit their homepage.

Recent changes with the Thrift Savings Plan, such as the introduction of a Roth TSP, prompted individuals within the Airman & Family Readiness center at Cannon Air Force Base, N.M., to hold a class giving an overall purview of this retirement savings program, Dec. 12.

Though Airmen have a defined benefit plan that takes effect after 20 or more years in service, that alone may not be enough to continue their current lifestyle upon retirement. This is where other avenues such as a TSP come in; adding additional funding to supplement their current plan that can be accessed penalty free six months after the individuals 59th birthday.

A TSP is a defined contribution plan, where a person may invest their money in a variety of specific funds, each with a different level of risk and return. Military members can opt for a percentage of their pay, up to the amount of $17,500 during the year 2013, to go into the fund automatically each month. Those serving in a tax-free zone are able to contribute up to $51,000 in 2013.

The main difference between the traditional TSP and the Roth is when the money is taxed.
A traditional TSP gives an initial break - the funds are tax deferred until withdrawal. The Roth TSP, however, is taxed as the money goes into the account and is withdrawn tax free. A way to measure which is more beneficial is to determine whether a person's tax bracket will be higher now, or in the future.

"In different stages of your life you have different needs and different priorities," said Linda Sapp, 27th Special Operations Force Support Squadron Airman & Family Readiness Center community readiness consultant. "Some need the tax break now. For those individuals, the traditional TSP may be better. For others, the fact that earnings are not taxed on withdrawal is enticing and the Roth may be a better option. It all depends on each individual's, or families', tax needs."

Another defining factor is that a Roth TSP cannot have money withdrawn without penalty before it has grown five years from the account start date.

Both the traditional TSP and Roth will have to be converted to a different retirement plan after an individual gets out of the military if they want to keep contributing funds. If not, they can leave it alone to grow. According to the TSP official homepage, traditional TSPs can be transferred out to eligible employer plans, traditional IRAs and Roth IRAs. A Roth TSP can be transferred out to Roth 401Ks, Roth 403(b)s, Roth 457(b)s and Roth IRAs.

While many people currently have a traditional TSP, they will be unable to transfer the funds in that account to a Roth. While it is possible to have both the traditional and Roth, the accounts are not interchangeable. Money cannot be diverted from one to the other and they will always function separately.

"The time to start saving is now," said Sapp. "The sooner you start, the more you will end up with. There will almost certainly be periods of loss, but stay the course. A TSP is long term. The question isn't whether you can afford to invest for your retirement; it's whether you can afford not to."