Both the Roth Thrift Savings Plan (TSP) and the Roth Individual Retirement Account (IRA) offer great tax advantages and tax-free growth. It is important to have options in early retirement to draw upon both tax-free income and tax-deferred income (tax diversification). Both can play an important part in your retirement plan for FERS Federal Law Enforcement (LE) and FERS Special Category Employees (SCEs).
FERS SCEs include Law Enforcement, Firefighters, Air Traffic Controllers, etc. These SCE employees can retire EARLY at any age with 25 years of service in an SCE position or at age 50 with 20 years of service in an SCE position.
Since SCE employees can retire early, they can draw on the FERS pension and the FERS OPM retirement annuity supplement (RAS). However, this amount may not be enough to live on in retirement. The RAS stops at age 62, and the SCE employee can then decide to turn on Social Security.
The Roth TSP and Roth IRA both have a five-year rule and the age 59½ requirement for earnings, but not for the contributions.
The Traditional TSP
The TSP is a retirement savings plan available to all federal employees. The TSP works like a 401(k). With the Traditional TSP (Taxed Later), these funds can be accessed the year the SCE employee turns 50 or with at least 25 years of SCE service without an early Traditional TSP withdrawal penalty.
The Traditional TSP should not be rolled over to a Traditional IRA until after age 59 and ½ to preserve the early withdrawal option. The traditional TSP funds (principal and earnings) are taxed as ordinary income upon withdrawal.
Roth TSP
The Roth TSP (Taxed Now) allows contributions with after-tax dollars. The earnings withdrawal in retirement are tax-free upon certain conditions being met (age 59 and ½ and a 5-year holding requirement). The Roth TSP differs from the Traditional TSP where funds can be accessed at age 50 (for SCEs) without penalty.
Roth IRA
The Roth IRA is an account opened with a brokerage firm (i.e. Fidelity, Vanguard, Schwab) and is available to persons who earn less than $165,000 for single tax filers and $246,000 for married couples filing jointly in 2025. When the Roth IRA is opened, contributions are made with after-tax dollars.
The Roth IRA usually will have lower fees (expense ratios) and a wider selection of stocks, mutual funds, bonds, and ETFs. Using the Roth IRA, one can withdraw contributions (but not earnings) at any time without taxes or penalties.
Differences between Roth TSP and Roth IRAs
Income and Contribution Limits
Roth TSP
For 2025, the contribution limit is $23,500, with an additional catch-up contribution of $7,500 for those aged 50 and older. The TSP offers a 5% match and has no income limits.
Roth IRA
The Roth IRA has a lower contribution limit as well as income limits. For 2025, individuals under 50 years of age can contribute up to $7,000, with an additional $1,000 catch-up contribution for those aged 50 and older.
There are income limits for Roth IRA eligibility. For 2025 single filers, the ability to contribute begins to get phased out at a modified adjusted gross income (MAGI) of $150,000 and is eliminated at $165,000. For 2025 married couples filing jointly, the phase-out range is $236,000 to $246,000.
Investing Options
Roth TSP investment options
The Roth TSP has investment options consisting of the G, F, C, S, and I funds. These funds are all passive index funds with low fees (expense ratios). The TSP also includes the L funds (Lifecycle Funds) that are a combination of the previous TSP funds that adjust as the employee approaches retirement.
Roth IRA investment options
The Roth IRA has a much wider selection of investment choices to include stocks, bonds, mutual funds, ETFs, and other investments. These investments usually have lower fees (expense ratios) than the TSP funds.
Rules on Withdrawing Funds
Roth TSP
To withdraw earnings tax-free, the Roth TSP funds must be held for at least five years, and the owner must be at least 59 and ½ years old, disabled, or deceased. Early withdrawals may be subject to taxes and penalties on earnings (not contributions). If an SCE employee after separation and before 59 and ½ years of age withdraws funds from the Roth TSP, the funds are distributed pro rata (proportional).
For example: If the Roth TSP contains funds of $100,000 ($60,000 of contributions and $40,000 earnings) and the SCE employee took an early distribution of $10,000, then $6,000 would be designated as contributions and not taxable and the other $4,000 would be designated as earnings and would be taxed at ordinary income tax rates and assessed a 10% early withdrawal penalty.
Roth IRA
The Roth IRA contributions can be withdrawn at any time without tax or penalties due to being made with after-tax dollars. Roth IRA withdrawal ordering rules state that Roth IRA contributions always come out first, then conversions, followed by earnings. There is no pro rata rule for the Roth IRA like there is for the Roth TSP.
Also, for the Roth IRA tax-free earnings withdrawals, the account must meet the five-year rule and the 59 and ½ age requirement. This Roth IRA contribution withdrawal option gives the Roth IRA an advantage over the Roth TSP for those SCE employees who might need access to their contributions before 59 and ½ or any age.
Roth IRA Strategy
With a Roth IRA, if a person starts investing at age 25 and invests $583.33 monthly ($7,000 per year) at 10% for 25 years and then retires at age 50, this person will have accumulated $773,981.
The $773,981 Roth IRA funds consist of $175,000 in contributions and $598,981 in earnings. This person could withdraw the contributions without tax or penalty at any time.
Roth TSP Strategy
With a Roth TSP, the earnings can only be accessed at age 59 and ½ and the Roth TSP account has to be open for 5 years (5-year rule). If an SCE employee funds the Roth TSP and retires at age 50, the SCE can do a trustee-to-trustee transfer of the Roth TSP to a Roth IRA.
The transferred Roth TSP contributions can then be accessed tax- and penalty-free. Once inside the Roth IRA, the Roth IRA ordering rules take place, and the contributions come out first: FIFO: first in – first out.
The Roth TSP 5-year time frame does not carry over to the Roth IRA. The Roth TSP earnings and post-transfer earnings now inside the Roth IRA will be tax-free only if they are qualified (i.e., 5-year holding rule and age 59 and ½ or older).
Track Roth IRA Contributions
Track your yearly contributions in your Roth IRA every year you make a contribution. These yearly amounts are usually indexed to inflation, so the annual amounts will increase/change in the upcoming years.
You can do both:
- Fund the TSP to get the 5% match.
- Next, fully fund the Roth IRA annually.
- Finally, fund the Roth TSP and/or Traditional TSP with any additional available funds.
The choice is yours:
- The SCE employee can have early access to Traditional TSP funds at age 50 or earlier without penalty at ordinary income tax rates.
- The SCE employee can have early access to the Roth TSP contributions upon transfer to a Roth IRA at retirement. Even if the Roth IRA 5-year rule has not been met (non-qualified), the SCE still has early access to the contributions.
- The SCE employee also can have early access to an existing Roth IRA and withdraw contributions at any time without taxes and penalty, if needed.
What is important is to start early with the Roth IRA to get the 5-year clock started and then fund these savings vehicles as much as possible to have a comfortable, early retirement.
James D. Cronin is a former IRS-CI Special Agent, retired ATF Special Agent/Supervisor, and holds the ChFC, MSFS, and CFP designations.
