Federal employees face unique retirement challenges, especially when navigating options for tax-advantaged savings. Most private-sector employees spend their time evaluating the differences and benefits of the Roth 401(k) vs. Roth IRA. However, federal employees typically have to travel a different path when saving for their golden years.
While unique government agencies have a few exceptions, most federal workers have access to the Roth Thrift Savings Plan (TSP) rather than a 401(k). For government workers creating a strategy for retirement planning in Arlington, VA, it’s essential to take a closer look at Roth TSP and Roth IRA accounts. Understanding how these two options compare can help you make an informed decision about how they might fit in your financial plan.
Federal Employee Retirement Accounts: Post-Tax Options
Roth accounts are retirement savings vehicles that allow individuals to contribute post-tax dollars. The key advantage to these accounts? Qualified retirement withdrawals— including contributions and earnings — are tax-free, providing certain conditions are met. The tax advantages of these accounts make them particularly appealing for those anticipating a higher tax bracket later in life.
Key Differences Between These Tax-Advantaged Accounts
While both of these accounts allow post-tax contributions and tax-free withdrawals, there are differences between these two savings vehicles. Some things federal employees should know when considering these accounts include:
Contribution Limits
- Roth TSP: For 2025, federal employees can contribute up to $23,500 (with an additional $7,500 catch-up contribution for those aged 50 and older).
- Roth IRA: The contribution limit is significantly lower than its TSP counterpart. In 2025, the contribution limit remains the same as in 2024: $7,000 for those younger than 50 years old. Additionally, a catch-up contribution of an additional $1,000 allows those 50 and older to contribute $8,000.
Income Restrictions
- Roth TSP: No income limits exist. Federal employees can contribute to a tax-advantaged TSP regardless of their salary.
- Roth IRA: Contributions are phased out based on modified adjusted gross income (MAGI). For 2025, individuals filing as single with a MAGI of less than $150,000 can contribute the full $7,000. Those married filing jointly with a MAGI of less than $236,000 can also contribute the full amount. Once MAGI exceeds these limits, the contribution limit decreases until it’s completely phased out.
Employer Matching
- Roth TSP: Offers employer matching contributions of up to 5%, making it an attractive option for maximizing retirement savings.
- Roth IRA: No employer matching is available, as it is an individual retirement account.
Withdrawal Rules
- Roth TSP: Withdrawals can be subject to early withdrawal penalties if certain conditions are not met. The “five-year rule” applies, requiring the account to be open for at least five years before tax-free withdrawals can be made.
- Roth IRA: Typically, these accounts have a more flexible withdrawal rule, allowing for contributions (but not earnings) to be withdrawn at any time without penalties. However, criteria for penalty-free withdrawals on investment gains must meet the five-year criteria, and the account owner must be age 59 ½ or older.
Considering a Conversion With Your Retirement
A Roth conversion can also come into play for government workers saving for retirement. This type of conversion allows federal employees to convert pre-tax retirement savings, such as a traditional TSP, into a Roth TSP or IRA. This strategy can be useful for those anticipating a higher tax bracket in retirement, as it enables them to pay taxes on the converted amount now and enjoy tax-free withdrawals later. Federal employees may also consider this type of conversion when they have lower taxable income years, making it a strategic move to manage tax burdens effectively. However, evaluating how a conversion fits into the overall retirement plan is essential, especially when considering contribution limits, employer matching, and withdrawal flexibility.
Making the wrong move on a Roth conversion can lead to unnecessary taxes and penalties. Avoid costly mistakes by getting a free Roth conversion analysis from Good Life Financial Advisors of NOVA.
Making The Right Choice for Your Retirement Plan
When evaluating these accounts, several factors come into play:
Tax Considerations
Understanding your current and future tax brackets is critical when developing a cohesive retirement savings plan. If you anticipate being in a higher tax bracket after leaving the workforce, contributing to a Roth account now can be beneficial.
Contribution Ability
If you have the financial means to maximize your Roth TSP contributions, it’s often wise to do so first to take full advantage of employer matching. Once you’ve reached the contribution limit, a Roth IRA can be a great supplement.
Investment Options
The Roth IRA offers a broader range of investment options than the TSP, which has a limited selection of funds. If investment flexibility is a priority, a Roth IRA may be appealing.
Access to Funds
If having access to your contributions without penalties is important, a Roth IRA might provide more flexibility. Roth TSP accounts, however, may allow for loans under certain conditions, which can provide liquidity if needed.
Common Scenarios and Case Studies
Let’s take a closer look at some common scenarios highlighting situations where an individual may choose one (or both) of these options.
Scenario 1: Federal Employee with High Income
John, a federal employee earning $170,000, wants to contribute to a Roth account but his salary exceeds the Roth IRA income limits. For someone in John’s situation, contributing to a Roth TSP account may prove an ideal solution. John can not only take advantage of saving in an account with no income restrictions, but he can also tap into the added boost of employer matching.
Scenario 2: Federal Employee Nearing Retirement
Sarah, a federal employee planning to retire in five years, wants to maximize her tax-free retirement income. She contributes the maximum to her Roth TSP but also opens a Roth IRA to diversify her investments and allow for tax-free withdrawals in early retirement.
Scenario 3: Married Couple with Diverse Incomes
Liz, a federal employee and her spouse, Rob, a private-sector worker, plan their retirement strategy. Liz contributes to her TSP to take advantage of the match. Meanwhile, Rob employs a powerful strategy known as the Mega Backdoor Roth or Mega Roth 401(k). This approach involves making after-tax contributions to a traditional 401(k) and immediately converting them to a Roth 401(k), maximizing tax-free growth potential.
Retirement Planning in Virginia: Create a Strategy That Works for You
Choosing between a Roth TSP and a Roth IRA isn’t a one-size-fits-all decision. Your income, contribution ability, and retirement goals should guide your strategy. For most federal employees, contributing to the Roth TSP to secure employer matching is a smart first step. Once that’s maximized, a Roth IRA can provide additional tax-free retirement savings with greater investment flexibility.
If you’re unsure which option best fits your needs, consulting a financial advisor with experience in federal employee benefits can help you create a strategy tailored to your situation.
Schedule a Call With Good Life Financial Advisors of NOVA Today
Your financial future deserves experienced insight and guidance. Whether you’re considering a Roth TSP, Roth IRA, or both, Good Life Financial Advisors of NOVA can help you build a strategy that aligns with your goals. Contact us today for a free, personalized consultation to help you start planning for your financial future.
We’ll have a short conversation to see if we’re a good fit for each other.
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