Thrift savings plans (TSPs) and individual retirement accounts (IRAs) both offer a Roth option, which allows you to save money on an after-tax basis. This option is particularly beneficial if you anticipate paying a higher tax rate at retirement. If you're fortunate enough to be able to contribute to both a Roth IRA and a Roth TSP, knowing the differences between the two plans will help you decide which one should be your priority in funding each year. One major difference is that Roth TSPs are typically for federal employees, while Roth IRAs are for a much broader base.
The contribution limits for Roth IRAs are much lower than the limits for Roth TSPs. As of 2012, you can contribute $5,000 to a Roth IRA if you are under 50; $6,000 if you are 50 or older. For Roth TSP plans, you can contribute up to $17,000 if you are under 50 or $22,500 if you are 50 or older. In addition, your employer cannot match your contributions to a Roth IRA. With a Roth TSP, your employer can match the contribution, but the match must be contributed to a traditional TSP.
Most federal employees can contribute to a Roth TSP. To contribute to a Roth TSP, you just need to be covered by an eligible retirement plan system and in pay status, meaning you're receiving a paycheck. You have to be receiving a paycheck, because your contributions are taken directly from you paycheck. To contribute to a Roth IRA, you don't have to be employed by the federal government, but you do need to have earned income from some source. For example, you could use your self-employment income or wages from another job to qualify. In addition, your modified adjusted gross income cannot exceed the annual limits, which the IRS announces each year in Publication 590.
Qualified distributions from Roth IRAs and Roth TSPs are both tax-free. However, early distributions are treated slightly differently. For both accounts, early withdrawals of contributions are tax-free and penalty-free while early withdrawals of earnings are taxable and subject to a 10 percent additional tax. When you take an early Roth IRA distribution, you first take out all of your contributions and only after removing all contributions will you start withdrawing earnings. With a Roth TSP, your early distributions are always prorated; you won't be able to avoid the taxes and penalties like you can a traditional IRA.
Roth IRAs prohibit you from taking a loan from the account. Roth TSP plans, on the other hand, allow you to take loans just like you would from a traditional TSP plan. You can borrow up to the smaller of $50,000 or 50 percent of your TSP vested balance. For example, if you have $40,000 in your Roth TSP, you can borrow up to $20,000.
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