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Roth IRA versus Roth TSP for Federal Employees

Federal retirement plans differ from those available to private sector employees and may be more generous. Roth Thrift Savings Plan (TSP) is a retirement account solely for federal employees, and although many consider it the same as the Roth IRA, they have different benefits.

If you have just started working with a federal agency or are considering retirement, understanding these differences will allow you to maximize your retirement earnings.

What is a Thrift Savings Plan?

This is one of the accounts included in the Federal Employees Retirement Service (FERS), along with the basic benefit plan and social security. They are similar to the private sector 401(k) retirement plan but are only available to members of the military and federal employees with either the FERS or the Civil Service Retirement System (CSRS) coverage.

As a defined contribution plan, the amount you earn from your TSP will depend on the returns from your employee contributions. If you enter federal employment after October 1, 2020, your employer will immediately set aside 5% of your salary to contribute to your TSP.

Even without employee contributions, the agency will include 1% as an agency/service contribution to the TSP, independent of your paycheck.

Roth TSP

This is a thrift savings plan retirement account with contributions from after-tax incomes. This account requires a federal employee to pay their taxes in the present, which will make contributions and future earnings tax-free upon withdrawal.

Roth IRA

This is an individual retirement account that uses taxed income as contributions, and the withdrawal of the contributions and earnings will, in turn, be tax-free. Workers can start adding to their account at any age, although the withdrawals are exempt from taxes only when the worker is above the age of 59.

Similarities Between Roth TSP and Roth IRA

Roth TSP and Roth IRA are often confused. As Roth accounts, they have the following similarities.

Employee Contributions are Taxed Immediately

Both the Roth TSP and Roth IRA tax a worker’s income in the present, but everything they withdraw from the accounts afterward will be tax-free.

For example, if a worker earns up to 50% of their original contributions through the years, they can withdraw this additional amount without worrying about tax cuts.

They Use The 5-Year Rule

Roth TSP and Roth IRA also have a five-year sentence between the first time an employee contributes to their Roth account and when they withdraw the contributions. After these five years, any earnings from their retirement account will not be taxed.

Differences Between Roth TSP and Roth IRA

While they are both tax-free, Roth TSP and Roth IRA have a few differences. These distinctions are key in determining which account will provide you with the biggest earning potential in the long run.

  1. Contribution Limits Vary

In 2021, the annual contribution limit for Roth IRAs will be $6,000 or $7,000 if an employee is aged 50 or older. For a Roth TSP, however, the 2021 contribution limit will be $19,500.

This makes a huge difference when considering retirement. The more someone can contribute to their plans, the more they can earn from their Roth accounts by the end of each year.

If a person will earn 30% of their contributions when they decide to withdraw, this means they will receive around $1,950 from their Roth IRA, but $5,850 from their Roth TSP. So, the earning from Roth TSP is three times as much as that of Roth IRA! The Roth thrift savings plan can, therefore, be more profitable for someone whose income allows them to reach the higher annual contribution limit.

  1. Roth IRA Has Income Limits – Roth TSP Doesn’t

If a worker exceeds the income limit, they can’t keep contributing to their Roth IRA.

As a married couple, for example, the maximum level of adjusted gross income is $198,000. That said, they can still make reduced contributions to their Roth IRA until their income reaches $208,000.

A Roth TSP doesn’t have income limits, allowing them to earn more from their contributions over time.

  1. Roth IRA Has No Required Minimum Distributions (RMDs)

RMDs mean you have to withdraw a specified amount every year from your retirement account as soon as you turn 72.

Roth IRAs don’t have this requirement, but Roth TSPs do.

A Roth IRA will allow someone to maintain their money in the account for longer periods, thus making full use of the tax advantages of retirement accounts.

  1. Matching Contributions

Roth TSPs have matching contributions from the agency of employment, while Roth IRAs don’t. This means however much an employer contributes to their account, their federal agency will match their contribution (with a maximum of 5%).

Roth IRA versus Roth TSP for Federal Employees









If a worker contributes 5% of their pay for their Roth IRA, their earning will represent that amount. With the Roth TSP, however, the contribution essentially doubles, and their earnings will also increase. It’s almost like free money!

Which Roth Account Should You Use?

Overall, Roth TSPs may be more beneficial for a federal employee. If you are looking for an account that has higher contribution and income limits, the Roth TSP is the way to go.

Matching contributions also add a sizable difference to the earnings between the two accounts. However, if a worker has turned 72 and is more interested in keeping their savings intact by not withdrawing money to fulfill RMDs, Roth IRAs may appeal to them, too.

At Your Federal Retirement, we run workshops that provide federal employees with everything they need to know about federal retirement and walk them through its intricacies so they can make informed decisions.

Schedule an appointment with us today.