Since its introduction in 2012, the Roth TSP has provided federal employees with an additional avenue for retirement savings. Let’s delve into the pros and cons to help you determine if enrolling in a Roth TSP aligns with your financial goals.
Pro: Roth TSP Benefits for Higher Tax Bracket Retirees
Opting for a Roth TSP is advantageous if you anticipate being in a higher tax bracket during retirement. It’s essential to note that the current income tax cuts set to expire by December 31, 2025, will likely result in reversion to previous, higher tax rates.
Con: Requirements for Tax-Free Withdrawals
While a Roth TSP offers tax-free withdrawals in retirement on contributions and qualified earnings, specific Internal Revenue Code (IRC) conditions must be met. These include a 5-year waiting period since your initial Roth TSP contribution and reaching age 59½, being permanently disabled, or deceased. Failure to meet these requirements subjects earnings to income taxes upon withdrawal.
Pro: Roth TSP as an Emergency Fund
In emergencies requiring significant funds, withdrawing from a traditional TSP may push you into a higher tax bracket. However, tapping into your Roth TSP balance for large sums incurs no taxes on contributions or qualified earnings, providing a tax-free emergency fund option.
Con: Limitations on Fund Transfers
Unlike traditional TSPs, Roth TSPs do not allow indirect rollovers or fund transfers from Roth IRAs. If you already possess a Roth IRA, the inability to consolidate funds into a Roth TSP poses a notable drawback.
Pro: SECURE Act 2.0 Eliminates Roth TSP RMDs
Effective January 1, 2024, Required Minimum Distributions (RMDs) from Roth TSPs cease to exist. Given that Roth TSP distributions in retirement are tax-free, this eliminates the obligation to withdraw funds and preserves earnings.
Before reaching a verdict, consulting with an FRC® trained advisor well-versed in TSP intricacies is prudent. Their expertise can provide invaluable insights tailored to your retirement planning needs.
