| |
Traditional or Roth? Make the choice that works for you.
Now that we’ve sent you an overview of the Roth in-plan conversion feature coming in January, let’s take a closer look at what the different tax treatments of traditional and Roth TSP mean. Whether this information is new to you or just review, it can help you think about your tax situation now and what you expect it to be in the future. Then you can choose the tax option that makes sense for your financial goals.
|
|
Tax now or tax later? You decide.
One of the most important decisions you’ll make about your TSP investments is when to pay income tax on your money—when it goes in or when you take it out. As a reminder, here are the basic differences:
Traditional TSP (pre-tax)
- You haven’t yet paid income tax on the money in your traditional TSP balance.
- When you withdraw from your traditional TSP balance, you’ll pay income tax on both contributions and earnings from investment growth.
- If you’re making contributions to your traditional TSP balance, and you’re eligible for Agency/Service Matching Contributions, your traditional TSP contributions will be matched, and the matching contributions go into your traditional TSP balance.
Roth TSP (after-tax)
- You already paid income tax on the money in your Roth TSP balance.
- When you withdraw from your Roth TSP balance, your contributions are always tax-free.
- Earnings from investment growth in your Roth TSP balance are also tax-free if they’re “qualified” by meeting BOTH these conditions:
- it’s been at least 5 years since January 1 of the year you made your first Roth contribution, and
- you’re age 59½ or older, permanently disabled,* or deceased.
- If you’re making contributions to your Roth TSP balance, and you’re eligible for Agency/Service Matching Contributions, your Roth TSP contributions will be matched, and the matching contributions go into your traditional TSP balance. (Agency/service contributions always go into your traditional balance, and this isn’t something you can elect to change.)
Special rules for uniformed services contributing tax-exempt pay
If you’re a member of the uniformed services and receive tax-exempt pay for serving in a combat zone, you have more to consider about the choice between traditional and Roth TSP contributions. You can find out more about how tax-exempt contributions affect your traditional and Roth TSP balances on our website.
|
|
How to decide what’s right for you
There’s no right or wrong choice between traditional and Roth tax treatments—each has its own benefits. The key is to think about your future tax rate: Will you pay more or less in taxes during retirement (or later in retirement, if you’re already retired) than you do now?
- While you can’t predict the future, asking yourself a few thoughtful questions can help you make a decision that fits your situation. Are you in a low tax bracket now?
- Will you have other taxable income in retirement?
- Will you keep working after you start taking TSP distributions?
If you answered “yes” to these questions, Roth TSP might be the better choice since you can pay taxes now while your tax rate is lower.
On the other hand:
- Are you in a high tax bracket now?
- Will you have fewer expenses in retirement and need less money than your current income?
If so, traditional TSP could help you save more now by putting off paying taxes until later at a lower tax rate.
There are other things to think about when deciding on tax treatments. If you're not sure what's right for you, it might help to talk to a tax advisor.
|
|
You don’t have to choose just one
You can choose between Roth, traditional, or both—whatever fits your needs. If you’re making contributions, you can also change your tax choice any time through your payroll system.
And starting in January 2026, you’ll be able to move money already in your TSP account from your traditional (pre-tax) balance to your Roth (after-tax) balance. This is called a Roth in-plan conversion. If you don’t already have a Roth balance, your first conversion will create one.
|
|
Next up
In the next email of our traditional and Roth TSP series, we’ll explore the differences between Roth TSP and an outside Roth IRA. Look for “Roth TSP and Roth IRA: What’s the difference?” in your inbox in the coming weeks.
In case you missed it
This is the third email in a series about traditional and Roth TSP. If you missed previous emails or want to reference them again, you can use these links:
-
Roth and traditional: What's the difference? (Taxes.)
- Roth in-plan conversion overview
|
|
|
* We cannot certify to the IRS that you meet the IRS definition of disability when your taxes are reported. You must provide the justification to the IRS when you file your taxes.
|
|
|
|
|
