Roth TSP

The Roth TSP is a retirement savings option available to U.S. federal employees and members of the uniformed services. It cleverly merges the features of a Roth IRA with the federal government's Thrift Savings Plan (TSP), which is the public sector’s equivalent of a private-sector 401(k) plan. The “Roth” designation means you contribute money after you’ve paid income taxes on it. Think of it as paying your tax bill upfront. While you don't get an immediate tax deduction on your contributions, the trade-off is incredibly powerful: all your investment earnings grow completely tax-free. When you retire and start taking qualified withdrawals, every single penny—your original contributions and all the growth—is yours to keep, free from federal income tax. This provides a huge advantage for long-term planning, offering certainty and protecting your nest egg from future tax rate hikes.

Imagine your paycheck. With a Traditional TSP, your contribution is taken out before the taxman gets his share, lowering your taxable income for the year. With a Roth TSP, the taxman takes his cut first, and then your contribution is sent to your TSP account. You are essentially using post-tax dollars. Once inside your TSP account, both Roth and Traditional dollars are invested exactly the same way. You choose from the same lineup of low-cost investment funds (like the C, S, I, F, and G funds). The magic happens decades later. When you withdraw from your Traditional TSP, it’s treated as ordinary income and taxed. But when you make a qualified withdrawal from your Roth TSP, it’s a tax-free event. To be “qualified,” you generally need to be at least 59 ½ years old and have had your Roth TSP account open for at least five years.

Choosing between a Roth and a Traditional TSP boils down to a single, critical question: Do you think your tax rate will be higher now or in retirement? It's the ultimate “pay me now or pay me later” decision.

• Roth TSP: You pay income taxes on your contributions today at your current marginal tax rate. In exchange, your qualified withdrawals in retirement are 100% tax-free.
• Traditional TSP: You get an income tax deduction on your contributions today, lowering your current tax bill. In exchange, your withdrawals in retirement are taxed as ordinary income.

The best choice depends entirely on your personal financial situation and your outlook on future tax rates.

• Team Roth TSP: This is often a fantastic choice for:
  1. Younger employees: You're likely in a lower tax bracket now than you will be at the peak of your career. It makes sense to pay taxes at today's lower rate.
  2. Tax-savvy planners: If you believe federal income tax rates will generally be higher in the future, locking in today's rates is a smart defensive move.
  3. Those seeking tax diversification: Having a bucket of tax-free money in retirement gives you flexibility to manage your taxable income from other sources (like pensions or Traditional accounts).
• Team Traditional TSP: This can be the better option for:
  1. High-income earners: If you're in your peak earning years and a high tax bracket, the immediate tax deduction is very valuable.
  2. Those expecting a lower income in retirement: If you plan for your retirement income to be significantly less than your current income, your retirement tax bracket may be lower, making the “pay later” strategy more attractive.

For a value investor, the Roth TSP isn't just a retirement account; it's a strategic tool for building and preserving long-term wealth.

Value investors hate unpleasant surprises. Future tax hikes are a major, unpredictable risk to any retirement plan. The Roth TSP eliminates this risk for the money held within it. By paying taxes today, you create a pool of assets with a future tax liability of zero. This certainty is invaluable and a core principle of managing risk over the long term.

The power of compounding is the engine of wealth creation. In a Roth TSP, this engine runs on high-octane, tax-free fuel. Every dollar of interest, dividend, and capital gain is reinvested and grows without the drag of future taxes. Over a multi-decade career, this tax-free compounding can result in a significantly larger nest egg than a taxable or tax-deferred account, even with the same initial contributions and investment returns. It ensures that the fruits of your patient, long-term investing belong entirely to you, not you and the IRS.