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Traditional TSP vs. Roth TSP: Understanding the Differences

Traditional TSP vs. Roth TSP: Understanding the Differences

When planning for retirement, one crucial aspect to consider is choosing the right retirement savings account. Two popular options available to federal employees and members of the military in the United States are the Traditional Thrift Savings Plan (TSP) and the Roth TSP. While both accounts serve the purpose of helping individuals save for retirement, there are fundamental differences between them. In this article, we will explore the disparities in contribution limits, matching contributions, taxation, and withdrawals between Traditional TSP and Roth TSP.

Contribution Limits:

One significant distinction between Traditional TSP and Roth TSP lies in the contribution limits. As of the current year 2023, the maximum amount an individual can contribute to either account is $22,500, with an additional catch-up contribution of $7,500 for those aged 50 and above. However, it's important to note that these limits are subject to change over time due to adjustments made by the Internal Revenue Service (IRS).

Matching Contributions:

Another aspect to consider is the potential for matching contributions. In the Traditional TSP, employer contributions are made on a pre-tax basis, which means they are not subject to income tax at the time of deposit. However, these contributions and any earnings on them will be taxed when withdrawals are made during retirement. On the other hand, Roth TSP contributions are made on an after-tax basis, meaning they are subject to income tax at the time of deposit. However, qualified withdrawals from a Roth TSP, including any earnings, are tax-free during retirement.


Taxation is a key factor that distinguishes Traditional TSP and Roth TSP. Contributions to a Traditional TSP account are made with pre-tax dollars, meaning they reduce an individual's taxable income in the year of contribution. However, when withdrawals are made during retirement, the funds are taxed at the individual's ordinary income tax rate. This approach can be advantageous if you expect to be in a lower tax bracket during retirement compared to your current tax bracket.

On the other hand, contributions to a Roth TSP account are made with after-tax dollars, so they do not provide an immediate tax break. However, the benefit of a Roth TSP lies in the tax-free nature of qualified withdrawals during retirement. If you anticipate being in a higher tax bracket when you retire, a Roth TSP may be a more favorable option since you would effectively lock in your current tax rate. One of the major topics I often see overlooked is something called Tax Allocation as you move throughout the accumulation phase of saving and investing. You must consider Taxable, Tax deferred, and Tax free allocations and how those investments will be withdrawn during the spend-down phase. The SECURE ACT and SECURE ACT 2.0 have radically changed how to best utilize these planning opportunities to reduce your tax liability. Tax deferred assets include 401(k)/403(b), TSP, IRAs, and other tax deferred accounts. Tax free assets include Roth 401(k), Roth TSP, Roth IRA, 529, HSA, and other tax free accounts. The taxability of the accounts above are based on a variety of factors.


The rules regarding withdrawals from Traditional TSP and Roth TSP accounts also differ. Traditional TSP withdrawals are subject to ordinary income tax rates, and if taken before the age of 59 ½, they may also incur a 10% early withdrawal penalty. Roth TSP withdrawals, on the other hand, are tax-free as long as they are considered qualified distributions. To be qualified, a Roth TSP account must have been open for at least five years, and the individual must be over the age of 59 ½ or meet other qualifying criteria, such as disability or death.

It's important to note that while Roth TSP contributions are always tax-free upon withdrawal, any earnings on those contributions may be subject to taxes and penalties if withdrawn before meeting the qualified distribution criteria.

Choosing Between Traditional TSP and Roth TSP:

Deciding whether to contribute to a Traditional TSP or Roth TSP depends on various factors, including your current tax bracket, expected tax bracket during retirement, and personal financial goals. If you believe that your tax rate will be higher in retirement or if you prefer the flexibility of tax-free withdrawals, a Roth TSP may be the more suitable choice. Conversely, if you anticipate being in a lower tax bracket during retirement or desire a tax break in the present, a Traditional TSP might be the better option.

Todd Pouliot, AIF

Photo by Pavel Danilyuk:

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