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What are the differences between traditional TSP and roth IRA?

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Well, I've got to say, as tax-advantaged accounts that allow you to save for retirement, they both put a big smile on my face!

 

However, there are some key differences between the traditional TSP and a Roth IRA. Here are a few that stand out to me:

 

Traditional TSP yields tax benefits today.  Contributions to the traditional TSP reduce your taxable income today. When you contribute to the traditional TSP, generally up to $18,000 in 2016, you're not taxed on that money. Obviously, that can lower your 2016 tax bill. 

 

Roth IRA is potentially tax-free tomorrow. With the Roth IRA you aren't able to tax a tax deduction this year. However, your contributions and earnings over the years are all available tax-free once you've had the account for at least 5 years and are 59 1/2. That could be a sweet deal in the future.

 

TSP is funded with payroll deduction. As you probably know, you can sign up for the TSP on myPay and money will be automatically deducted from your paycheck. To allocate your investments within the TSP you'll have to visit the tsp.gov website. This is a great way to live the old adage, "pay yourself first." You can set up an allotment to an IRA or fund it with a periodic investment from your checking account. Either way, you'll be making your contributions for the future automatic, and that's a good thing.

 

Other key differences. The TSP offers low cost investment options that you typically won't be able to match from a cost perspective in a Roth IRA. On the other hand, with a Roth IRA, you'll have a lot more options to choose from. Finally, Roth IRA contributions can be withdrawn at anytime without taxes or penalties. That's not an option with the traditional TSP although you may be able to take a loan from your TSP account (and not from a Roth IRA).

 

Remember, the TSP also offers a Roth option. So, if you like Roth (or more Roth) you can allocate some or all of your TSP contribution to the Roth TSP. If you're deployed to a tax-free zone, the Roth TSP is definitely worth considering. If you have additional questions, give one of our advisors a call at 800-771-9960, they can walk you through the details. Good luck!

 

JJ