5 Reasons to Avoid the Roth TSP (and Roth Conversions)
When it comes to retirement savings, many individuals consider various options to maximize their wealth while minimizing tax implications. One such option is the Roth Thrift Savings Plan (Roth TSP), which allows federal employees and members of the uniformed services to save for retirement on a tax-free basis. Although the Roth TSP has advantages, there are several reasons why you might want to think twice before committing your savings to it or pursuing Roth conversions. Here are five reasons to avoid the Roth TSP and Roth conversions.
1. Immediate Tax Implications
One of the primary reasons to reconsider the Roth TSP is the immediate tax burden. Contributions to a Roth TSP are made with after-tax dollars, meaning you’ll pay taxes on your income in the year you make contributions. For high-income earners or those in their peak earning years, this means sacrificing a significant portion of current cash flow to pay taxes upfront. In contrast, traditional TSP contributions lower your taxable income, providing more immediate tax relief and allowing you to invest a larger sum of money now.
2. Tax Rate Uncertainty in Retirement
Many people assume that their tax rates will be lower in retirement, but this is not always the case. With the ever-changing landscape of tax legislation and the possibility of future tax increases, betting on lower tax rates in retirement may prove unwise. If you anticipate living a comfortable lifestyle in retirement, your taxable income could remain elevated, negating the benefit of tax-free withdrawals from a Roth account. In such instances, traditional TSP accounts, which are taxed at withdrawal, might be more advantageous.
3. Contribution Limits
The Roth TSP has the same annual contribution limits as the traditional TSP, which can limit your savings potential, especially if you’re trying to play catch-up as retirement approaches. The maximum contribution limits are often insufficient for those needing to save larger amounts. While in-service withdrawals and rollovers can be an option for certain plans, having an upper limit on contributions can hinder your overall retirement strategy, especially if you have high disposable income or are late in your career preparation.
4. Inherited Roth Accounts
One of the less-discussed downsides of Roth TSPs and Roth IRAs deals with inherited accounts. Unlike traditional IRAs that can be stretched over the beneficiary’s lifetime, commencing required minimum distributions (RMDs) from inherited Roth accounts often must be taken within a 10-year period for non-spousal beneficiaries. This may lead to larger-than-expected tax liabilities being thrust upon heirs, diminishing the anticipated benefits of tax-free inheritance. For those wishing to pass on wealth, the complexities and potential drawbacks of inherited Roth accounts warrant serious consideration.
5. Investment Flexibility and Control
The Roth TSP, while excellent for some, often provides limited investment options compared to what is available through a traditional brokerage account or even other retirement plans. Participants in the Roth TSP may find their investment choices restricted to the funds offered within the TSP itself, which may not always align with their investment strategies or risk tolerance. This limitation can hinder growth potential compared to diverse investment options in other tax-advantaged accounts or taxable brokerage accounts.
Conclusion
While the Roth TSP and Roth conversions offer appealing benefits like tax-free growth and tax-free withdrawals in retirement, they are not without their drawbacks. High initial tax implications, potential future tax rate uncertainties, contribution limits, issues with inherited accounts, and restricted investment options all merit thoughtful consideration. Ultimately, your retirement strategy should be tailored to your unique financial situation, long-term goals, and risk tolerance. Consulting with a financial advisor can help you navigate these complex options and determine the best path for your financial future.
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You should ask whether taxes will go up or down when you retire. Its hard to predict with certainty but taxes are historically low right now.
I recently adjusted my Roth IRA to 50% in SCHD, 25% in SCHX, and 25% in SCHG. For my Roth 401k, I went with 70% in Vanguard's S&P 500 Index, 20% in the Vanguard Growth Index, and 10% in the Vanguard International Index. My goal is to grow my $350k to over $1 million within the next three years.
Started a traditional TSP when it rolled out in 2001 for the military. Never started the Roth TSP since already maxing out ours at VG since 1998. As soon as I retired in 2015 I rolled the TSP into an IRA and started backdoor Roth conversions up to the max 12% bracket. Some years I could only convert 5-10k to fit into the 12% bracket, will finish conversions in 2027.
Too late. I am already happily retired under CSRS.
The worst financial advice that I ever followed was "do not open a Roth. Put all of the contributions in a traditional account and get the deduction now because you will be in a lower tax bracket when you need the money".
Now I have a huge tax tumor. Am paying much more in taxes from distributions now than that meager deduction I had when working.
I really don't think a Roth conversion is the way to go in most cases. If you're not retired it makes no sense and if you are retired and have multiple income sources you can hold the acct until 75 and then take your minimum RMDs between 5% to 10% annually and the balance continues to grow probably faster then your withdrawals. At 85-95 or so you can pass the deferred acct it to your kids and or Grand kids at probably a lower tax rate compared to yours. Take more than the minimums if it looks like your heirs will be in a higher bracket than you
Incredibly horrible advice
Your handwriting sucks
$1000 in Trad TSP or $700 in a Roth TSP, that is the question!
I contribute $450 in each per pay period. Which is very close to the max for this year.
We all know Taxes are going to INCREASE for us and our kids, Pay the taxes now. Also, See if you can use a HDHP with a HSA then invest the HSA funds with a HSBA. When you turn 65 it essentially becomes another Roth bucket.
First time in this channel, glad that I stumble into it, I have Roth TSP already for many years but I decide to stop contributing and instead put the funds in a brokerage Roth IRA, the reason is for the flexibility I will have once I retire, luckily the Roth IRA is having much better performance than the Roth TSP also. I'm maximizing the traditional TSP with good results.
Nice, thanks!
Well if you're 25 and just getting started you can't possibly know what kind of situation your heirs will be you might not even be married. Regardless of how you do it the point is try to save 15% of your gross income I am agnostic between Roth and traditional IRA. If you are in a hot startup company and you get stuck options make sure you put those in a Roth. They could grow to millions and when you get old enough you can withdraw the money without paying a dime.
If I'm contributing $1,200 a month to my traditional TSP and decide to stop traditional TSP contributions and switch to $1,200 contributions to Roth TSP, how much will I pay in taxes the following year?
I'm a GS-12 making $103,000. Single (not married) and I also have a Roth IRA.
I have been retired for almost 5 years, I have all of my savings in the G Fund, is it too late to convert a portion to a Roth IRA.
I have 2 major issues with a ROTH:
First – You tend to retire with lower "income" thus lower taxes. (so contribute ROTH in your early low paying career then leave it alone) then shift to traditional TSP during high income years.
Second – there are 12 states that DO NOT tax your TSP, FERS, nor SS. So may want to plan to relocate for retirement. Especially if retiring from high value state (CA, NY, etc) to one of these twelve, then home ownership is a huge bonus.
I’ll take Roth any day. When I retire I don’t want to be messing with RMDs and taxes, I just want my money and to be free to do what I want with it
Like you said, with all the MONEY that is being printed out of thin air, something and someone has to pay for that. Future tax liabilities ARE NEVER GOING TO BECOME LESS. Pay the taxes now and get your earnings tax free.