The TSP Two-Step

By on April 10, 2012 in Current Events with 14 Comments

Things You’ll Need for Texas Two-step:

  • Wranglers
  • Wide Belt
  • Cowboy Boots
  • Bandanna
  • Western Shirt
  • Cowboy Hat
  • Lone Star Beer (optional)

Things You’ll Need for TSP Two-step:

  • Recent Leave and Earnings Statement
  • 2011 Tax Return
  • Lone Star Beer (optional)

The Roth TSP two-step is a bit of a dance maneuver, something like its sibling, the Texas two-step.  It requires a little skill, some coordination, and a desire to master the event.

You’ve received bulletins, emails, and highlights on the upcoming rollout of the Roth TSP.  The issue that has been danced around, however, is how to determine whether it makes sense for you.  There’s a two-step (aha!) process to help you determine if you should participate in the Roth TSP, and if so, to what extent. The questions you’re looking to have answered include:

  • Do I expect to be in a lower or higher tax bracket when I retire? (if it’s lower, the Roth TSP may not be right for you.)
  • How much room do I have in my current tax bracket before any income adjustment would put me into a higher tax bracket?
  • If I contribute more to the Roth TSP and less to the regular TSP, how will that affect my paycheck?

The first step is to determine your taxable income which appears on Line 27 of your 1040 tax return. Do you expect any significant changes to this income, such as retirement, a promotion, a lump sum annual leave payout for 2012? Make any adjustments as necessary and then compare this number to the 2012 tax brackets (see tax brackets in the document below).

Where does your income fall within your current bracket?  If you were to contribute the full $17,000 to the Roth instead of the traditional TSP, that would increase your taxable income by $17,000.  Does that leave you in the same bracket?

Example:  Your taxable income from line 27 on your married, filing jointly return is $137,000.  You are considering putting your entire $17,000 contribution into the Roth TSP.  This adds $17,000 to your $137,000 giving you a taxable income of $154,000.

Within your current 25% bracket, the upper limit is $142,700, meaning that $11,300 of your income will be taxed at the 28% rate rather than the 25% rate.  You might be fine with that, or you might want to contribute only $5,700 to the Roth TSP which would take you to the top of the 25% bracket.

Keep in mind that your highest tax bracket rate is not the same as your effective tax rate which is the average of taxes paid within each bracket.

Now that you’ve determined how much you might be willing to contribute to the Roth TSP within tax limitations, it’s time to calculate the effect that contribution will have on your net pay.  This is where your leave and earnings statement comes in.

You can use one of the many online paycheck calculators (e.g., to compare your current net pay with the impact of changing your TSP contribution to an after-tax contribution. This takes a little effort, because you’ll have to enter each line item deducted from your gross pay.  Rather than making your TSP contribution pre-tax as it appears on your leave and earnings statement, you’ll make it an after-tax contribution which affects the bottom line of your paycheck.

Once you’ve entered your potential Roth TSP contribution on the paycheck calculator, along with your other deductions, your net pay will appear.  If you think you can get by on the lower amount, you may want to go ahead with the Roth TSP contribution. Your final decision is whether you can live on the lower amount…and still afford the occasional Lone Star Beer.

If you’d like to participate in a 30-minute webinar to learn all the details of the new Roth TSP, send an email to and the webinar info will be forwarded to you.

2012 IRS Tax Brackets

© 2016 Ann Vanderslice. All rights reserved. This article may not be reproduced without express written consent from Ann Vanderslice.


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  1. Hose3711 says:

    Ask the TSP board to increase interfund tranfers to 3 and watch your balance grow

  2. Thom K. Hall, CFP says:

    Ann, this is a great article about an important topic. I hope many feds see the benefit of utilizing Roth’s for creating tax free income in retirement.

  3. Potsyben2 says:

    Will a Roth TSP affect the amount I can contribute to a Roth IRA?  I currently max out the Roth IRA so does that kill the new Roth TSP for me?

    • Thom K. Hall, CFP says:

      No, the calculation for Roth IRA contributions are separate from the Roth TSP – you can contribute to both, so long as your income does not make you ineligible for Roth IRA contributions.

  4. Rmalisz says:

    Your taxable income is found on line 37, not 27 on the 1040 as stated in the article.

    • USPS Letter Carrier says:

      “27  Subtract line 26 from line 25. If line 26 is more than line 25, enter -0-.  This is your taxable income.”

      Too bad no edit function so one can correct mistakes and typos.

  5. Msgrowan says:

    The article does not mention another very important additional factor to take into account.  For estate planning purposes, the TSP’s Roth-like option (n.b. this option is NOT a Roth IRA; it has separate legal existence and there are differences between the TSP version and a true Roth IRA) will permit a rollover to a true IRA as a withdrawal option.  This is significant because, unlike a traditional IRA, a Roth IRA can be included in an estate for one’s heirs, while maintaining its tax free interest aspect.  This could be a really important factor for many, which has not gotten much coverage of discussion.

    • USPS Letter Carrier says:

      TSP site does not make clear how Roth and tradition TSP can be withdrawn at retirement. The TSP pub “A New TSP Element” states:

      “You will be able to take loans, in-service withdrawals, and partial withdrawals from your account as before … on a pro rata basis — with a proportional amount from your traditional and Roth balances.”

      But is not clear if “pro rata” occurs at retirement.

      However, Ed Zurndorfer @ Federal Daily answers a reader’s question with:

      “you will be able to move your entire Roth TSP account to a “rollover” Roth IRA … [and] leave your traditional TSP account in the TSP. If you leave all of your money in the TSP (both your traditional and Roth TSP accounts), you will be able to make separate withdrawals (designate which account the withdrawals will come from).”

  6. Fed Peasant says:

    An interesting article & a Roth TSP is a good option to have available.  I have had two Roth IRAs for several years.  One at USAA & the other at Goldman Sachs.  I will not add the TSP Roth to my holdings.  The tradional TSP is enough.

    • Edsclone says:

      You should remember that the TSP funds charge much less in management fees than another company’s funds, so you might end up with less returns.

    • WeatherGuy says:

      Could you transfer one (or both) of your existing Roth’s to the TSP Roth?

      • USPS Letter Carrier says:

        Nope, you can’t as per the TSP publication, A New TSP Element:

        “You will be able to transfer Roth 401(k), Roth 403(b), and Roth 457(b) (but not Roth IRA) money into the Roth balance in your TSP account.”

    • Thom K. Hall, CFP says:

      Also keep in mind you have 5 choices with TSP – all essentially indexes, so you get the good, the bad, and the ugly of owning any index. The big advantage of TSP options is very low fees, and simplicity, the disadvantage is that YOU become the fund manager, and you have very few choices.

      • USPS Letter Carrier says:

        Never would have thought a CFP would attribute “the bad, and the ugly” with an index fund. Those slurs would be more appropriately attached to managed funds with high expense ratios, high turnovers, and underperfomance relative to their index benchmarks. A big advantage he neglects to mention is diversification of owning the whole market. And as such “very few choices” is beside the point. “YOU becoming the fund manager” is wrong on several counts as an index fund doesn’t require a fund manager per se in the managed fund sense. And most anyone with a typical 401k would somehow have to MANAGE their fund selection, allocation and rebalancing anyway.

        Anyone who wishes to own managed funds with high expense ratios and the bad and ugly that comes with them is welcome to purchase them in an IRA and or taxable account.