Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== 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. ===== How Does a Roth TSP Work? ===== 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. ===== Roth TSP vs. Traditional TSP: A Head-to-Head Comparison ===== 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. ==== Tax Treatment Showdown ==== * **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**. ==== Who Benefits Most? ==== 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: - **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. - **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. - **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: - **High-income earners:** If you're in your peak earning years and a high tax bracket, the immediate tax deduction is very valuable. - **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. ===== The Value Investor's Perspective ===== 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. ==== Controlling Future Liabilities ==== 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. ==== Compounding Power Unleashed ==== 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]].