Many retirees assume they will fall into a lower tax bracket upon retirement, but this assumption can often lead to unexpected tax liabilities.
Consider Your Future Tax Bracket
Your primary sources of federal retirement income—your monthly FERS annuity (pension), Social Security, and distributions from your traditional TSP—are all subject to income taxes. Additionally, income from a spouse’s 401(k) and other investments may land you in the same or even a higher tax bracket during retirement. In this context, the Roth TSP offers significant advantages.
Enjoy Tax-Free Withdrawals with the Roth TSP
Contributions to a Roth TSP are made with after-tax dollars, meaning you pay taxes at your current income tax rate. Consequently, Roth TSP withdrawals in retirement are tax-free. With the Trump Tax Cuts expiring at the end of 2025 and the age for Required Minimum Distributions (RMDs) increasing to 75 in 2033, the taxes on your traditional TSP distributions might be significantly higher than anticipated.
The Roth TSP vs. The Roth IRA: Key Advantages
One notable advantage of the Roth TSP over a Roth IRA is the employer match you receive with your contributions, a benefit not available with a Roth IRA. Furthermore, while income limits apply to Roth IRA contributions, there are no such thresholds for the Roth TSP. Additionally, Roth TSP fees are typically lower than those of Roth IRAs.
“When you withdraw from your Roth TSP balance, you do not owe taxes on your contributions or any qualified earnings.”
Use Your Roth TSP Balance as a Tax-Free Emergency Fund
Financial experts recommend that retirees maintain an emergency fund for unexpected expenses. If you withdraw from your traditional TSP balance for an emergency, you will owe taxes on the withdrawal, potentially pushing you into a higher tax bracket. Withdrawals from your Roth TSP balance, however, are tax-free, covering both your contributions and any qualified earnings.
No More RMDs for the Roth TSP
As of January 1, 2024, federal retirees are no longer required to take RMDs from their Roth TSP accounts. This change, brought about by the SECURE Act 2.0, allows your Roth TSP nest egg to grow indefinitely, providing tax relief for your beneficiaries when you pass away.
Connect with an FRC® trained advisor to explore how incorporating the Roth TSP into your retirement strategy can benefit you.
