Whether you contribute to a Traditional or Roth TSP depends on whether you think your tax rate will be higher or lower today than when you retire.
With a Traditional TSP you defer paying taxes on contributions and earnings until you withdraw. This means less money is taken out of your paycheck because you will only be taxed on your income after contributions are made. This also means that you will later be taxed on any earnings made from your investment when you withdraw from your TSP. Eligible employer plans and traditional IRAs are allowed to be transferred into your Traditional TSP. In addition to those, transfers into eligible Roth IRAs are also allowed.
With a Roth TSP you pay taxes on your entire paycheck before contributions, and you get your earnings tax free when you withdraw. This means you get less money from your paycheck than if you were in a Traditional TSP. Transfers are allowed in and out for Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs.
It is also an option to mix a Roth and Traditional Contribution. The money will be kept separate for tax reasons.
Deciding where to contribute depends on your marginal tax rate now versus your rate at retirement. Traditional contributions are to your advantage if your tax rate will be lower at retirement. Roth contributions are to your advantage if your tax rate will be higher at retirement. Reassess your decision anytime your tax, income or personal situation changes.
Typically, someone who is just starting their career may benefit from Roth contributions. Once they reach a higher wage, they may start thinking of switching to Traditional contributions.
Thomas A Crowley
wwww.tsptalk.com
Last Look Report
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