With the traditional TSP, contributions are made with pre-tax money (income which has not been taxed), grows tax free over the years, and then you are taxed on everything you withdraw. (Unless you are a member of the military making tax-exempt contributions such as combat zone tax exclusion pay, in which case you are not taxed when you withdraw your original contributions.)
In a Roth TSP, your contributions are made with income on which you have already been taxed (unless you are military making a tax free contribution), then they grow tax free over the years, and finally you withdraw both contributions and gains tax free.
Despite all the arguments on either side of the issue, there is no real advantage in terms of how much growth you can expect from your money over the course of your career by choosing one option over the other. The effects of compounding the higher contributions made to a traditional TSP exactly match the benefit you obtain by not paying taxes on the gains under a Roth TSP.
Here’s the math showing how much money will you have available to spend in 10 years, after paying income taxes, under the traditional TSP vs. the Roth TSP:
So the only question you need to answer to make this decision is whether you expect to be paying a higher tax rate now or when you retire. If you believe you will be in a lower tax bracket after you retire, you should stick with the traditional TSP. If you believe average tax rates will go up in the future or you will be in a higher tax bracket at the point you start withdrawing, you should seriously consider a Roth TSP. If you are likely to be in the same tax bracket, it probably doesn’t matter which you chose.
I personally don’t believe tax rates are likely to be higher overall when I start withdrawing from my Thrift Savings Plan in another 15 years or so. And I don’t believe that my various sources of income at that stage will be enough to push me into a higher tax bracket (and I might well fall to a lower bracket), so I have elected to stay with the traditional TSP.
More information on the Roth TSP:
- You can contribute to a traditional TSP, a Roth TSP, or both. You do so with a contribution election to instruct your agency what to do (TSP contribution elections vary by agency, so contact your human resources department to obtain the form or get pointed to the online page).
- The combined total of your Roth TSP and tax-deferred traditional TSP contributions are capped at the elective deferral limit.
- Agency contributions will always be made to your traditional TSP balance.
Allocations and Transfers:
- All contribution allocations or interfund transfers will apply to the investment of both your Roth TSP and traditional TSP contributions or balances.
Existing TSP funds:
- Funds which are already in your account when you begin making Roth TSP contributions will remain part of your traditional TSP balance. You may not convert those funds to a Roth TSP.
- You can take loans, in-service withdrawals, and partial withdrawals from your Roth TSP account just as you could with a traditional TSP. They will come out of your account on a pro rata basis with a proportional amount from your traditional TSP and Roth TSP balances.
- When you withdraw from your Thrift Savings Plan account, you will be able to separately transfer any portion of your Roth TSP and traditional TSP balances to IRAs or to other eligible employer plans.
From the TSP.gov website: