4 Key Differences Between Roth and Traditional TSP That Could Affect Your Retirement Savings Strategy

Key Takeaways:

• The biggest difference between Roth and Traditional TSP is when you pay taxes—choosing the right option can significantly impact your retirement savings.
• Understanding Required Minimum Distributions (RMDs), employer matching rules, and tax-free withdrawals can help you build a smarter retirement strategy.

Understanding How Roth and Traditional TSP Impact Your Retirement

Your Thrift Savings Plan (TSP) is one of the most powerful retirement savings tools available to federal employees. But deciding between Roth and Traditional TSP isn’t always straightforward. Many employees simply stick with Traditional TSP because that’s what they’ve always used—but that might not be the best approach.

• Also Read: Leaving Your TSP Alone Can Be Risky—Especially If You’re Already Retired
• Also Read: FERS Pension Gone? Here’s What Really Happens If You Resign Tomorrow
• Also Read: These TSP Tips Are What Financial Planners Wish More Government Employees Knew

Before deciding where to put your money, here are four key differences between Roth and Traditional TSP that could affect your retirement savings strategy.

1. Taxes: When Do You Want to Pay?

The most fundamental difference between Roth and Traditional TSP is when you pay taxes:

• Traditional TSP: Contributions are made pre-tax, meaning they lower your taxable income now. However, you’ll have to pay taxes when you withdraw the money in retirement.
• Roth TSP: Contributions are made after taxes, so you don’t get a tax break today—but withdrawals (including earnings) are tax-free in retirement as long as you follow the rules.

How This Affects You:

• If you expect to be in a lower tax bracket in retirement, Traditional TSP may be the better choice because you’ll pay less in taxes when you withdraw the money.
• If you expect to be in a higher tax bracket later, Roth TSP could save you thousands in taxes by allowing you to withdraw money tax-free.

Example:

Imagine two federal employees, Alex and Jordan, both contributing $10,000 per year to TSP for 30 years.

• Alex contributes to Traditional TSP and gets a tax break today. When Alex retires, all withdrawals are taxed as regular income.
• Jordan contributes to Roth TSP, paying taxes upfront. But in retirement, Jordan’s withdrawals are 100% tax-free.

If tax rates increase in the future, Jordan comes out ahead because they never have to worry about taxes on their withdrawals.

Key Takeaway: If you want a tax break now, go with Traditional TSP. If you want tax-free withdrawals later, Roth TSP is the better choice.

2. Required Minimum Distributions (RMDs): Roth TSP Offers More Flexibility

One of the biggest advantages of Roth TSP is that it is now exempt from Required Minimum Distributions (RMDs)—this was a major change starting in 2024.

Here’s how it works:

• Traditional TSP: You must begin taking RMDs at age 73, whether you need the money or not. If you don’t take your required withdrawals, the IRS will penalize you 25% of the amount you should have withdrawn.
• Roth TSP: You are not required to take RMDs, meaning your money can continue growing tax-free indefinitely.

This makes Roth TSP a great option if you want to leave money in your account for as long as possible or pass it down to heirs without forcing unnecessary withdrawals.

Key Takeaway: If you want more control over your withdrawals in retirement, Roth TSP is the better choice.

3. Employer Matching Contributions: They’re Always Taxed Later

A common misconception is that if you contribute to Roth TSP, your entire balance will be tax-free. But that’s not entirely true.

• Your own contributions to Roth TSP grow tax-free.
• However, your agency’s matching contributions will always go into a Traditional TSP account, which means they will be taxed when withdrawn.

This means that even if you contribute 100% to Roth TSP, you’ll still have some taxable withdrawals in retirement because your employer match is always pre-tax.

Example:

Let’s say you contribute $500 per paycheck to Roth TSP. If your agency matches 5%, that matching amount will be placed in a Traditional TSP account, which will be taxed when withdrawn.

Key Takeaway: Even if you use Roth TSP, be aware that your employer match is taxable in retirement.

4. Retirement Withdrawals: Tax-Free vs. Taxable Income

How you withdraw your TSP savings in retirement is another major difference between the two options.

• Traditional TSP: Withdrawals are taxed as ordinary income, meaning the more you withdraw, the higher your tax bill.
• Roth TSP: Withdrawals are completely tax-free, as long as:
  1. You’ve had the Roth TSP for at least five years.
  2. You’re at least 59½ years old.

Why This Matters:

If you rely only on Traditional TSP, your withdrawals could increase your taxable income, which may affect:

• Social Security taxation (more of your benefits could become taxable).
• Medicare premiums (higher income can lead to surcharges).
• Overall retirement tax liability.

Having a mix of Roth and Traditional TSP withdrawals can help you manage your taxable income more efficiently.

Key Takeaway: Roth TSP withdrawals are tax-free, while Traditional TSP withdrawals are taxable. Having both allows for better tax planning.

Which One Should You Choose?

The right choice depends on your current tax situation, expected future income, and retirement goals.

Roth TSP Might Be Better If You:

✅ Expect to be in a higher tax bracket in retirement.
✅ Want tax-free withdrawals in the future.
✅ Prefer to avoid Required Minimum Distributions (RMDs).
✅ Plan to pass down tax-free savings to heirs.

Traditional TSP Might Be Better If You:

✅ Expect to be in a lower tax bracket in retirement.
✅ Want a tax break now to reduce your taxable income.
✅ Need to lower your current tax bill.

A Blended Strategy Could Be the Best Approach

Many financial experts recommend a mix of Roth and Traditional TSP contributions for flexibility. With both accounts, you can:

• Reduce taxable income now with Traditional TSP.
• Enjoy tax-free withdrawals later with Roth TSP.
• Control taxable income in retirement by choosing which account to withdraw from each year.

How This Impacts Your Retirement Strategy

Your TSP is a powerful tool for building long-term wealth, but understanding the differences between Roth and Traditional TSP is key to making the most of it.

What You Should Do Next:

1. Review your current and future tax situation to determine which option fits your goals.
2. Consider contributing to both Roth and Traditional TSP for more flexibility.
3. Plan ahead for RMDs if you use Traditional TSP.
4. Talk to a licensed agent listed on this website for help in structuring a tax-efficient retirement plan.