Should You Invest in Roth IRA or Thrift Savings Plan?

Saving for retirement is one goal commonly shared by most individuals. Unless you are independently wealthy or inherit enough money to feel confident you will never have to rely on savings (I did not either one of these), you most likely want to put money aside during your working years to ensure your comfort and security when you retire. This can be done in any number of ways, as there are dozens of different “types” of retirement savings plans from which to choose. Each plan has its own benefits and drawbacks making it important to find the one that best meets your current and long term financial needs. Members of the military and federal employees have additional savings tools at their disposal, making the decision where to save even more complicated. Here we look at two popular savings plans available to service members, their families and United States Federal Government employees.

Roth IRA-After Tax Today For Tax Free Later

A Roth IRA is available to any individual or married couple that fall under the income thresholds established by the IRS. To be eligible as a contributor to a Roth IRA, you must make contributions from taxable compensation such as that received from self-employment, wages, salaries, commissions and bonuses. Members of the military, government and civilians have access to a Roth IRA if they meet the required conditions.

Roth IRA contributions are made with after-tax dollars, meaning the account owner will never again pay income tax on contributions or earnings when taking them as qualified distributions. Qualified distributions include the withdrawal of contributions at any time and earnings after the account is open for five tax years and the owner is 59 1/2 years of age. This is very beneficial to individuals who may find themselves in a higher tax bracket when distributions are taken as income tax has already been paid and no further taxation will occur.

Thrift Savings Plans

Available to service members and federal employees, the Federal Thrift Savings Plan is another option to consider for retirement savings. This plan commonly recognized by its acronym TSP, is similar to the standard 401k with which most savers are familiar. Different from the Roth IRA in many ways, contributions to the TSP are made with pre-tax dollars which reduces the amount of taxable income in the year contributions are made. Of course, since taxes have not been paid on contributions, distributions from the TSP will be taxed. If you are in a higher income tax bracket when money is withdrawn, this can be a disadvantage.

Differences Between The Two

The differences between the two plans do not end at how they are taxes. Consider the following to help aid in your decision as to which plan is best for your financial needs.

  • Contribution limits- You can contribution up to $16,500 per year in the TSP, versus $5,000 per year in the Roth IRA (For 2010).
  • Minimum withdrawal age- TSP account owners must be 59 1/2 years of age to avoid early withdrawal penalties for distributions. Roth IRA owners may withdrawal contributions at any age without penalty and earnings after age 59 1/2.
  • Required minimum distributions (RMD)- Minimum mandatory distributions must be taken from TSP at age 70 1/2 compared to the Roth IRA which has no such requirement. Failure to take the minimum required distribution results in a 50% penalty from the IRS.

Which One Did I Do?

Throughout my 9 year military career, I had access to both the Roth IRA and TSP. Since I was only in the National Guard, I mainly started with the Roth IRA, because I had more control over my investments. The TSP didn’t really become a viable option for me until I was deployed in 2005. Even though I could have socked away a ton of cash into it, I still opted to max out mine and my wife’s Roth IRA. Between that and really upping our emergency funds, we decided to pass on the TSP. Personally, I liked the control of the Roth IRA- I could buy what I wanted- and the potentially to have a tax-free nest egg waiting for me at retirement.

For active duty, the TSP might be more attractive since you can have it directly pulled out of your paycheck. The point of it all is that it’s never a bad thing to save. TSP or Roth- you just need to make sure you’re saving something for retirement. Both offer distinct advantages and in some cases disadvantages. Soldiers who have access to both a Roth IRA and TSP may benefit by first maxing out contributions to a Roth IRA and then putting additional savings in the TSP to gain the most benefits from both plans.

Creative Commons License photo credit: hans s

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Comments | 4 Responses

  1. estherlyne bayangos says

    I am Planning to open a Roth IRA but I am nost sure where to open one.Is it safe to do it online or just open it at my local bank? I have friends that tell me to open at Vanguard,what do u recommend?

    • cheeseman says

      Whatever you do, DO NOT invest any money through a bank; go to any of the mutual fund companies, Vanguard, Fidelity, T Rowe Price, etc. and do it yourself online or by calling them toll free.

      Vanguard usually has the lowest maintenance fees.

  2. Keith says

    Hey, love this piece. I think it’d be worth mentioning that as of July 2012 the government has set up a Roth TSP option for employees. Also, although you can’t make withdrawals from TSP accounts, you are allowed to take out loans up to $50,000 at a low cost of $50. You pay these loans back with interest but the interest goes into your account. For these reasons, including yours regarding the contribution limits, I’m leaning on the Roth TSP. I recently made full time at my job so I changed my contributions from contributing 20% to the basic TSP to investing 5% to the basic TSP account and 20%to the Roth TSP account.I’m also expecting a promotion in the next few months that will boost me from $30,000 to $40,000, at which point I will increase my total contributions 5-10%. I havent decided how I’d allocate the increased contributions (roth or basic) yet though. I’m 26 years old and extremely new to this investing thing which also has a lot to do with my choice.

  3. Christian L. says

    Jeff,
    We can never talk too much about saving money! That new Roth TSP option is getting super popular. From November 2012 through December, the number of enrolled military members almost quadrupled. I imagine that number will continue to increase.

    -Christian L. @ Smart Military Money

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