Since its inception in 2012, the Roth TSP has opened up an additional path for federal employees to save for retirement. Let’s explore the advantages and disadvantages to help you decide if enrolling in a Roth TSP aligns with your financial objectives.
Pro: Roth TSP Benefits for Those in Higher Tax Brackets in Retirement
Opting for a Roth TSP proves advantageous if you foresee being in a higher tax bracket during retirement. It’s crucial to consider that the current income tax cuts, scheduled to expire by December 31, 2025, may lead to a return to previous, higher tax rates.
Con: Conditions for Tax-Free Withdrawals
While a Roth TSP permits tax-free withdrawals in retirement on contributions and qualified earnings, specific conditions outlined in the Internal Revenue Code (IRC) must be met. These include a waiting period of five years since your initial Roth TSP contribution and reaching the age of 59½, being permanently disabled, or deceased. Failing to meet these criteria subjects earnings to income taxes upon withdrawal.
Pro: Roth TSP as an Emergency Fund
During emergencies necessitating substantial funds, withdrawing from a traditional TSP might push you into a higher tax bracket. However, accessing your Roth TSP balance for large sums incurs no taxes on contributions or qualified earnings, offering a tax-free emergency fund option.
Con: Restrictions on Fund Transfers
Unlike traditional TSPs, Roth TSPs do not allow indirect rollovers or fund transfers from Roth IRAs. If you already hold a Roth IRA, the inability to consolidate funds into a Roth TSP presents a significant drawback.
Pro: SECURE Act 2.0 Eliminates Roth TSP RMDs
Starting from January 1, 2024, Required Minimum Distributions (RMDs) from Roth TSPs no longer exist. As distributions from Roth TSPs in retirement are tax-free, this eliminates the need to withdraw funds and preserves earnings.
Before making a decision, it’s wise to consult with an FRC® trained advisor well-versed in TSP intricacies. Their expertise can offer invaluable insights tailored to your retirement planning requirements
