Roth TSP vs. Roth IRA

Both Roth thrift savings plans (TSPs) and Roth individual retirement accounts (IRAs) can offer significant tax advantages and the potential for tax-free growth, but they cater to different needs and circumstances. Understanding the differences between them can help you make an informed decision about which can be better suited for your retirement strategy.

If you need help picking a retirement plan, a financial advisor to walk you through the benefits and drawbacks for your needs and goals. 

The Roth TSP is a retirement savings plan available to federal employees and military personnel. It functions similarly to a 401(k) but includes a Roth component, allowing contributions with after-tax dollars. This means that withdrawals in retirement are tax-free, provided certain conditions are met. The Roth TSP is particularly attractive because it combines the Roth tax benefits with the unique features of the TSP, such as low fees and a wide range of investment options.

A Roth IRA, on the other hand, is an individual retirement account available to those who earn less than $161,000 for single filers and $240,000 for married couples filing jointly in 2024. Once you open a Roth IRA, contributions are made with after-tax dollars, like a Roth TSP, offering the same tax-free withdrawals in retirement. One of the key advantages of a Roth IRA is its flexibility. Investors have a broader selection of investment options when compared with a Roth TSP and can withdraw contributions (but not earnings) at any time without penalties or taxes. (Note: This does not apply to rollovers and conversions, only direct contributions.)

Some of the differences between Roth TSPs and Roth IRAs include: 

• Roth TSP: For 2024, the contribution limit is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 and older. This high contribution limit allows for substantial retirement savings, especially when combined with employer matching contributions. Employers can match up to 5% of the employee’s contributions, significantly boosting retirement savings. This benefit is not available with a Roth IRA.
• Roth IRA contribution limits: The Roth IRA has lower contribution limits. For 2024, individuals under 50 can contribute up to $7,000, with an additional $1,000 catch-up contribution for those aged 50 and older. However, Roth IRA eligibility is subject to income limits. For single filers, the ability to contribute begins to phase out at a modified adjusted gross income (MAGI) of $146,000 and is eliminated at $161,000. For married couples filing jointly, the phase-out range is $230,000 to $240,000 (for 2024).

• Roth TSP withdrawal rules: The Roth TSP has specific rules for withdrawals. To withdraw earnings tax-free, the account must be held for at least five years, and the account holder must be at least 59 ½, disabled, or deceased. Early withdrawals may be subject to taxes and penalties on earnings.
• Roth IRA withdrawal rules: It’s easier to avoid paying taxes on IRA withdrawals with a Roth IRA because contributions can be withdrawn at any time without taxes or penalties, as they were made with after-tax dollars. For tax-free earnings withdrawals, the account must meet the same five-year rule and age 59 ½ requirement. This flexibility can be advantageous for those who might need access to their funds before retirement age.

• Roth TSP investment options: The Roth TSP provides a limited selection of investment options, including lifecycle funds that adjust the asset mix as the participant approaches retirement. While these options are designed to be low-cost and easy to manage, they may not offer the level of customization some investors seek.
• Roth IRA investment options: A Roth IRA, on the other hand, offers a much broader array of investment choices. Investors can select from individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. This variety allows for a more tailored investment strategy, which can be particularly beneficial for those with specific investment preferences or goals.

Both the Roth TSP and Roth IRA offer specific advantages that can significantly impact your retirement savings strategy. The Roth TSP is an excellent choice for federal employees and military personnel, thanks to its high contribution limits, employer matching, and low fees. The Roth IRA, meanwhile, provides greater flexibility with investment options and withdrawals, making it suitable for those who prefer a more tailored approach to their retirement planning. By carefully considering the features, benefits, and limitations of each plan, you can make a well-informed decision that aligns with your financial goals and ensures a secure and comfortable retirement.

• A financial advisor can help you analyze and manage investments for your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to figure out how much you will need to retire comfortably, SmartAsset’s retirement calculator can help you get an estimate. 

Photo Credit: ©iStock/seb_ra, ©iStock/Drs Producoes, ©iStock/Jokic