How does tsp roth work

For example, if you know you are going to move to a state with high income tax i. California for retirement then you may want to use the Roth TSP to pay taxes before you move there. On the other hand, if you are going to retire to a state that has little or no income tax i. Florida then you may want to use the traditional TSP to delay taxes until retirement. Passing Money To Heirs. For some, leaving money behind for kids or others is a major factor to consider.

When you leave a traditional pre-tax account behind then your heirs will be on the hook for the tax bill as they distribute it. However, if you leave behind a Roth account then your heirs will enjoy the great blessing of tax-free withdrawals. Note: If you are a special provisions employee air traffic controller, fire fighter, law enforcement then you can access your TSP without penalty as long as you retire in the year you turn 50 or later.

Because traditional TSP withdrawals affect your income from a tax perspective it may just increase the price you pay for other things in retirement. For example, Medicare part B premiums go up as your income increases. You can find the cost of Medicare part B here. So if you are close to an income threshold then taking money out of your traditional TSP could not only cost you more in taxes but also cost you more in Medicare part B premiums. The same is true with Social Security. You can find out more about taxes on your Social Security income here.

This withdrawal often causes a large spike in income and taxes. But only you can decide whether you can spare the greater loss to your paycheck that paying the income taxes upfront will entail. One crucial difference, at least for those who are at the top of the salary pool: There is no limit to the amount of money you can earn and still contribute to a Roth TSP.

The standard Roth IRA or Roth k plan available to private-sector employees phases out contributions for those who earn above a certain amount. There is no salary limit for those who want to contribute to a Roth TSP. The number of people who participate in a Thrift Savings Plan.

Anyone who earns an income can open a Roth IRA or, for that matter, a traditional IRA, at a bank, through a broker, or through an online investment account. The annual limits to your contribution are the same, too.

If you go this route, your payments into the account won't be automatically deducted from your paycheck, although you could set up an automatic withdrawal from a bank account. The income you earn while deployed in a combat zone is excluded from your taxable income. Both are after-tax retirement accounts. You pay taxes on your contribution the year you make them unless you qualify for tax-exempt contributions. Contributions and earnings grow tax-free, and qualified withdrawals are tax-free, as well except for matching contributions.

Both are subject to the 5-year rule. Only the TSP is a payroll deduction. With a Roth IRA, you would open an account and contribute to it directly. Only the TSP has no income limits.

You can't withdraw money early from a TSP. You can withdraw your Roth IRA contributions at any time, with no tax or penalty. You must make minimum withdrawals from a Roth TSP. On the other hand, a Roth IRA has the same excellent tax benefits plus freedom from required minimum distributions later in life. Then, if you have extra money left to contribute, consider either a regular or Roth TSP contribution, depending on whether you want a tax deduction now or later. And there are no rules that prevent you from contributing to both.

Before making any decisions about your retirement savings accounts, it's helpful to discuss your options with a trusted financial planner or advisor. Internal Revenue Service. Accessed April 15, Military Dollar. Some foreign countries will tax TSP withdrawals, although if that foreign country has a tax treaty with the US, then the TSP account owner is eligible to receive a foreign tax credit on his or her US income tax return on taxes paid to the foreign country for TSP withdrawals.

Contributions to a Roth IRA made with after-taxed dollars can be withdrawn tax-free if needed such as to pay for an emergency or to use for a house down payment. But Roth TSP contribution withdrawals before age All employees should consider how they can save on taxes both now and in the future.

Contributing to the traditional TSP results in current-year tax savings, while contributing to the Roth TSP results in future tax savings. Few individuals can guess what their future tax rates will be. Edward A. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A.

The best way to get started is the Thrift Savings Plan, or TSP, a retirement savings plan for federal employees and members of the military that gives you two ways to sock away some cash. The TSP gives you a simple retirement strategy that makes saving money easier. Like the k plans offered by many private employers, TSP saves a percentage of your pay — you decide how much — through payroll deductions. Any contributions you make are yours to keep, whether you leave the military or stay in until retirement.

If you have questions about saving for retirement, contact Military OneSource to speak with a financial counselor.