Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better?

Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)? Both investing options are great choices to invest for retirement, but there are certain strategies for members of the military and their family to consider when investing. There are several fundamental differences between the two plans which point to where you might want to invest first. A Roth IRA allows investors to contribute “after tax” dollars to the investment and then withdraw the principle and earnings tax free during retirement. The Federal Government’s Thrift Savings Plan (TSP) functions like a civilian corporate 401(k) plan or public 403(b) plan. Money contributed to TSP is “before tax” dollars and withdraws in retirement are then taxed at your normal income tax rate.

There are many differences in the two plans, and you need to understand the intricacies to get the most out of your investments. Below is a list of the common features of both:

 

Thrift Savings Plan

Roth IRA

Contribution Limit $15,500 per year $5,000 per year
Minimum Age to Begin Withdraw 59 ½ years-old No Minimum Age
Age for Mandatory Withdraws 70 ½ years-old Never
Taxed When? When Withdrawn Before Invested
Getting Out of the Military? Contributions must stop Contributions can continue

Most members of the military are in a low income tax bracket while serving in the military and then usually move into a higher tax bracket towards the end of their careers and in retirement. Because TSP money is taxed when you withdraw it, you would then end up paying more in taxes using a 401-k retirement plan or TSP rather than a Roth in most scenarios. There is a distinct tax advantage to maxing out your contributions to a Roth IRA first, and then investing in the TSP with any additional savings after that.

For example, say you had $1,000 to invest and are in the 25% tax bracket right now. Your one time investment of $1,000 will go straight into TSP and grow to a little over $4,600 in twenty years (8% growth a year). Then, you withdraw it and owe taxes. But, now you are in the 38% tax bracket twenty years into the future. So, you get to keep $2,880 of your hard earned money after taxes. If you had invested that $1,000 twenty years ago in a Roth IRA, you would have $750 to invest after 25% was taken out right away for taxes. That $750 would grow into $3,500 in those twenty years and can be withdrawn tax free.

Now think of that $1,000 on a larger scale. If you maxed out a Roth IRA (currently $5,000 per year if you are under the age of 50) from the time you were 22 until 65, you would have $1.9 million tax free. Don’t believe me? Check out this easy to understand MS Excel spreadsheet where you can plug in your specific circumstances and see how much a Roth is actually worth. The spreadsheet gives you a comparison between a Roth IRA, a 401-k plan like TSP, and a standard mutual fund. Take a look at the spreadsheet and see how much each letter of the word Roth could be worth to you.

There is one last thing to think about with respect to the TSP for all the non-military Federal employees. The U.S. Government contributes a match of up to the first 5% you put into TSP. That is equivalent to a 100% return!! You should always put the maximum the government will match in TSP first or else you are just throwing away free money.

As of 2008, a person can put up to $5,000 in a Roth IRA or $10,000 in a joint fund if married. To open a Roth IRA, an investor has to have earned an income and file taxes. High wage earners making over $114,000 a year or $166,000 if filing a joint tax return cannot contribute to a Roth IRA. People over the age of 50 can invest an extra $1,000 as a catch-up payment for a total maximum investment of $6,000.

Share and Enjoy: Bookmark and Share

Advertisements

33 Responses to Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better?

  1. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better? […]

  2. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better?. This is some good analysis for your investment options by Military Money Might. I have a similar article: Where Should You Invest – TSP or IRA?. Whichever you choose, TSP or IRA, the sooner you start, the better. […]

  3. Jeff says:

    I believe the spreadsheet referenced above performs its calculations “backwards”. In other words, if I am currently contributing $4,000 per year to my TSP (or 401(k)) with no matching, I will only have $3,000 available after 25% tax to contribute to a Roth IRA. The spreadsheet appears to reverse these figures. Given the tax advantages of both TSP and IRA, assuming a service member (no matching) has less than or equal to $5,000 to invest per year, the decision of which to invest in rests solely with the answer to the question of after retirement tax rate vs. current tax rate. Traditionally, it has been assumed that an individual’s tax rate would decrease upon retirement because he would be making less. The current administration, however, has vowed to “change” everything, which I suppose means we can no longer rely on traditional logic.

  4. Nathan says:

    Just a note…your side by side comparison is misleading. The TSP only has minimum age requirement for in-service withdrawls, so if you retire prior to age 59 1/2 you can withdraw money without penalty. Also the Roth IRA has a minimum age of withdrawl above the principal of 59 1/2. You can withdraw as much money as you put in at anytime but you cannot touch the intrest (which should be the bulk of your account) until you are age 59 1/2.

    • Hank says:

      Nathan – You are right about withdrawing your priciple. But, TSP is exactly like a 401-k. TSP is just like a 401k. You cannot withdraw earnings and interest from TSP cannot be withdrawn until age 59 1/2.

  5. Jason says:

    The question I have is: I max out my Roth IRA at $5,000 each year and contribute 2% of my pay (around $200 a month) to my TSP as well. Can I do this?

  6. darlean says:

    You do not have to be 59 1/2 to take money out of a TSP. You only have to retire from the military. We took our money out last year when my husband was 44, and not only did we not pay taxes, but we did not pay a penalty.

    Where did you get this information?

  7. Albuquerque divorce lawyer…

    […]Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better? « Military Money Might[…]…

  8. If I am taxed by the government on my wages, and then taxed again on my IRA contributions before they go in, would I not be getting taxed twice on the same wages?? How is that better than getting taxed once on TSP contributions?

  9. Mary deese says:

    I need a number to contact someone about my 401k.it says was sent out 6 weeks ago and I never got it.im afraid it may have been cashed or something .i just need to talk to a representative about my 401 k.my number is 702-417-0012 you can also reach me at 702-722-6642

  10. Your way of describing everything in this article is
    actually nice, every one can without difficulty understand it,
    Thanks a lot.

  11. I visit everyday a few blogs and information sites to read
    posts, but this webpage presents feature based posts.

  12. Nutritional adjustments and exercises are by considerably the most organic approaches of shedding excess weight.

    Existence Extension Optimized Saffron with Satiereal capsules:
    Dr. Date sugar is sometimes employed to sweeten ice product and frozen desserts in the Levant.

  13. Stay away from investments that a large crowd of people have
    claimed to be a great opportunity. Although the majority usually rules in most instances,
    this isn’t the case. When people agree that an opportunity is great, then things are likely to change really soon. When people make investments, they shouldn’t
    be making, you should stay away.
    __________________________________________________________________________

    My Blog Stock charts For Mac

  14. Hello my family member! I wish to say that this post
    is awesome, nice written and include almost all significant infos.
    I would like to peer extra posts like this .

  15. It’s impressive that you are getting ideas from this article as well as from our dialogue made at this time.

  16. I always used to read piece of writing in news papers but
    now as I am a user of internet so from now I am using net
    for articles, thanks to web.

  17. Marlon says:

    Quality articles is the secret to be a focus for the
    users to pay a quick visit the web page, that’s what this web site is providing.

  18. Woah! I’m really loving the template/theme of this blog.

    It’s simple, yet effective. A lot of times it’s very hard to get that
    “perfect balance” between superb usability and visual appearance.
    I must say you have done a awesome job with this. Additionally, the blog
    loads very quick for me on Safari. Excellent Blog!

  19. Hello, I believe your website could be having web browser compatibility problems.
    Whenever I take a look at your website in Safari, it looks fine however,
    when opening in IE, it has some overlapping issues.
    I simply wanted to give you a quick heads up! Aside from that, great blog!

  20. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is … – Sep 22, 2008 · Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)?… […]

  21. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is … – Sep 22, 2008 · Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)?… […]

  22. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is … – Sep 22, 2008 · Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)?… […]

  23. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is … – Sep 22, 2008 · Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)? …… […]

  24. […] Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is … – Sep 22, 2008 · Should members of the military, their families, and U.S. Government Federal employees invest in a Roth IRA or the Federal Thrift Savings Plan (TSP)? …… […]

  25. day trader says:

    day trader

    Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better? | Military Money Might

  26. make money trading options

    Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better? | Military Money Might

  27. how to trade gold

    Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better? | Military Money Might

  28. binary options strategies

    Roth IRA vs. Thrift Savings Plan (TSP) 401k – Which Is Better? | Military Money Might

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

  • %d bloggers like this: