To Roth or Not to Roth?

What’s better for retirement savings: Roth or traditional? The author discusses some important considerations.

The question above is a common one federal employees face. The decision to fund a Roth TSP or Roth IRA can be a complicated one with a number of factors to consider.

We’ve written before about the various benefits of Roth from a tax perspective. Today’s blog will look more specifically on what you as a federal employee can contribute to Roth TSP and Roth IRA, as well as, what Roth TSP is not. We hope that today’s discussion will help you think through the big question: To Roth or not to Roth?

Contribution Limits

Both a Roth TSP and a Roth IRA have contribution limits. These limits are, as the name implies, the maximum amount you can contribute to the account per year. Keep in mind that IRA contribution limits are different from TSP contribution limits.

All information listed below is for 2019.

Roth IRA

If you are under age 50, you can contribute up to $6,000 per year to a Roth IRA. If you are 50 or older, you may contribute up to $7,000 per year. The income limit for single or head of household is a modified adjusted gross income (MAGI) of $122,000. If you are single and earn above this income limit you cannot fully contribute to a Roth IRA.

Those with an income greater than the threshold for married filing jointly – $203,000 – are not allowed to fully contribute to a Roth IRA. 

Roth TSP

On the other hand, if you are under the age of 50, you are allowed to contribute up to $19,000 this year to a Roth TSP. For those ages 50 or older, you are allowed to make catch-up contributions up to $25,000. With a Roth TSP there are no income limitations as there are for Roth IRAs. Also, you are able to contribute to both a Roth IRA and Roth TSP. If your income is below the limit, you can put $6,000 or $7,000 (depending on your age) into the Roth IRA and regardless of income fully fund a Roth TSP.

It’s important to understand that the guidelines are different between the two. Both the Roth IRA and Roth TSP have one thing in common: as long as you meet requirements, you can pull the money out tax-free. Tax-free distributions give you great options in retirement. This flexibility could benefit you greatly as you take a deeper look at taxes in retirement. 

The 2019 Roth IRA and Roth TSP contribution limits are summarized below:

Roth IRA Contribution LimitsRoth TSP Contribution Limits
$7,000 if 50 or older$25,000 if 50 or older
Subject to IRS Pub. 590 contribution Phase-outsSubject to ERISA rules
Single or head of household with MAGI of $122,000
Married filing jointly with MAGI of $203,000

A few things the Roth TSP is not

You cannot convert existing TSP funds to a Roth TSP, meaning, under current law, you are unable to move money from a Traditional TSP account to a Roth TSP account. However, you may convert Traditional TSP money to a Roth IRA.

The Roth TSP is not all or nothing. Let’s say you are contributing $25,000 per year to TSP. You may contribute $12,500 to your Traditional TSP and the other $12,500 to Roth TSP. You do not have to put all of your eggs in one basket. However, you cannot double up, meaning you will not be able to contribute $25,000 into your Traditional TSP and another $25,000 into the Roth TSP. You will only be allowed to contribute $25,000 per federal employee. 

FERS employees’ employer match will only be contributed to the Traditional TSP. For example, if you are contributing 5% to your Roth TSP, then your government match of 5% will be contributed to your Traditional TSP. You do not have to contribute 5% to the Traditional TSP for the government to put their 5% into the Traditional TSP. 

There are Required Minimum Distributions (RMD) on everything inside of your TSP when you reach age 70 ½. Roth IRAs do not have RMDs. If you do not need the money at 70 ½, the government forces you to take a percentage from your IRA or TSP whether you need it or not.

Roth IRA Advantages

  • Pay taxes on contributions allowing tax-free growth
  • No tax or penalty on growth when held for at least five years and reach age 59 ½
  • Full access to basis immediately
  • No RMDs when you reach age 70 ½

Roth IRA Conversions

  • No income limitations on conversions
  • Must recognize income in 2019 and pay tax by April 2020
  • Pro rata rules on conversions apply

If you are a federal employee considering converting some of your existing IRA money to Roth, you will owe tax on the conversion for this year. Once you pay taxes, any gains become tax and penalty free as long as you’ve held the money for at least five years and are age 59 ½.

If you would like to convert some of your TSP money to Roth and are over 59 ½, you do have the flexibility to move your money from the TSP into an IRA and then convert portions of your IRA into a Roth account over time. 

The Benefit of Understanding Roth

To Roth or not to Roth? It’s an important question and one worth taking the time to look into. Understanding your federal benefits, including Roth TSP and tax implications, will allow you to exchange any confusion for clarity in order to be ready to retire!

Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.

About the Author

Brandon Christy, CPA, PFS, is the founder and president of Retirement Benefits Institute, Inc. He is an established leader in contracted federal retirement benefits education, and his company has trained over 10,000 federal employees to help them gain clarity and confidence in retirement.