Can I contribute to a Roth IRA and the Roth TSP at the same time?[ Edited ]
I currently have a Roth IRA account set up with USAA which I fund to the maximum amount annually. Am I violating any tax laws if I opt to fund the Roth option TSP through my military paycheck as well?
Good news – The Roth police won’t be paying you a visit on this one! Even though both accounts are Roth plans, their contribution limits are not connected. Here’s how it works.
Big combined limits
For 2013 and 2014, the maximum annual contribution to the TSP for someone under age 50 (ignoring possible combat pay contributions) is $17,500 and the limit for a Roth IRA is 100% of taxable compensation up to $5,500. This means that if you have the income to support it, you could conceivably contribute a total of $23,000 to Roth accounts in each of these years and not find yourself in any hot water with the IRS. Even better, if you’re age 50 or older, the IRA limit increases by $1,000 and the TSP limit by $5,500.
One quick note of caution – if you’re currently contributing to the Traditional, pre-tax TSP and you’re planning to just switch those contributions to the Roth TSP, be aware that your take-home pay will go down slightly. This is true even if your contribution amount stays the same. Here’s why: Traditional pre-tax contributions reduce the amount of taxable income you receive. This, in turn, reduces the amount of tax you pay on each paycheck. However, with Roth contributions, your pay is taxed first and then the contribution is made. So even if your contribution amount is the same, using the Roth will result in a slightly lower paycheck due to the extra taxes you’ll be paying.
Having said all of that, if you think you’ll be in the same tax bracket or higher when you pull your money out in retirement, using the Roth account may be a great move. Why? Because it’s possible that the tax savings you’ll lose today by using the Roth can be more than made up for by the fact that you may never have to pay taxes on Roth withdrawals in retirement.
Finally, in addition to the general rules I’ve laid out here, it’s typically best to consult with a CPA or other qualified tax professional about your specific situation. That way you really don’t do anything to put you in harm’s way with the IRS.
Thanks so much for your question. I hope this helps and I wish you all the best!