Now that a ROTH Thrift Savings Plan (TSP) is being rolled out for military members, how does it differ from regular ROTH IRAs? Let's review the details.
ROTH TSP:
- Contributions are post-tax
- No income limitations for ROTH TSP contributions
- Contribution limits are $17,000 for taxpayers younger than 50 years (plus $5,500 catch up if older than 50)
- Earnings are tax free if account is held open 5 or more year and the taxpayer is over age 59 1/2 at the time of the distributions
- You can take out TSP loans up to 50% of your balance, up to a limit of $50,000
ROTH IRA:
- Contributions are post-tax
- Income limitation to contribute to a ROTH IRA: Single $110,000, (with decreasing eligible contributions up to $125,000; Married $173,000 (with decreasing eligible contributions up to $183,000.)
- Contribution limit is $5,000/$6,000 for those 50+
- Earnings are tax free if account is held open 5 or more year and the taxpayer is over age 59 1/2 at the time of the distribution
- Contributions can be withdrawn at anytime without penalty
- You cannot borrow against your ROTH IRA
So, now to the decision, should you contribute to one or the other or neither. For those who are in the 15% tax bracket (single taxpayers earning 8,700 – $35,350 or married filing jointly (MFJ) earning $17,400 – $70,700) you're best bet is likely to fully fund the ROTH IRA, then begin contributing to the ROTH TSP. For those in the 25% bracket (single $35,350 – $85,650 or MFJ $70,700 – $142,700) you can fully fund your deductible conventional TSP and have tax savings of enough to almost fully fund a ROTH IRA ($17,000 * 25% = $4250 tax savings). It's also likely that you'll be in a lower bracket at retirement.
In the end, the ROTH IRA remains our top choice for flexibility and tax free growth. The ROTH TSP is a great option for lower income military members, and for those who have large amounts of tax free earnings from deployments. For higher income military members we recommend a combination of deductible TSP and ROTH IRA for tax savings and flexibility.
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