Roth accounts are retirement plans that provide tax-free growth of contributions you, and possibly your employer, make. Unlike traditional IRAs and 401(k)s, Roth accounts do not allow you to deduct your contributions, but withdrawals are tax-free if you follow the rules. Two types of Roth accounts are the Roth IRA and Roth TSP.
What Is a TSP?
A TSP or Thrift Savings Plan is a qualified retirement savings plan for members of the uniformed services and federal employees. It is similar to a 401(k) employee retirement plan, and like a 401(k), a TSP offers a Roth option, known as the Roth TSP. You’ll find many differences when you compare a Roth TSP vs Roth IRA, including contribution limits and withdrawal rules.
Roth IRA Contributions Limits
As of 2018, you can contribute up to $5,500 earnings per year (or $6,500 once you reach age 50) to your Roth IRA. You can’t contribute more than your taxable compensation. Unlike a traditional IRA, you can contribute to a Roth IRA at any age, and you do not have to take required minimum distributions.
Your ability to contribute to a Roth IRA will be reduced or eliminated if your modified adjusted gross income (MAGI) exceeds certain thresholds. As a single filer, you can contribute a reduced amount if your MAGI is between $120,000 and $134,999, but zero for higher amounts. If you are a joint filer, you can contribute a reduced amount if you have a MAGI between $189,000 and $198,999, but contributions are prohibited if you have a MAGI of $190,000 or higher.
There are no contribution limits on a traditional IRA (although deductibility can be limited for high-earning taxpayers). If your MAGI precludes you from contributing to your Roth IRA, you have the option of contributing to a traditional IRA and then rolling it over to a Roth IRA. You’ll pay ordinary income tax on the transferred amount, but you won’t be hit with an early withdrawal penalty.
Roth TSP Contribution Limits
As of 2018, TSP participants can contribute elective deferrals of up $18,500 in earnings to their TSP accounts each year. This amount can be divided between a traditional TSP and Roth TSP in any ratio you desire. Earnings can stem from basic pay, special pay, bonus pay and incentive pay. Your employer can also contribute additional money to your TSP as long as the sum of elective deferrals and employer contributions doesn’t exceed $55,000 per year. If you are age 50 or older, you can make a catch-up contribution of $6,000 per year, separate and apart from the $55,000 limit.
There are no income-related contribution limits on a Roth TSP.
Note that you can make pre-tax contributions to a Roth TSP on tax-exempt pay earned in a combat zone. These contributions and subsequent earnings can be withdrawn tax-free later on, just as if they were regular post-tax contributions. The normal distribution rules apply to Roth TSP contributions made from tax-exempt pay.
Roth Rollover Rules
You can roll over an eligible rollover distribution from a qualified traditional or Roth account to a Roth IRA. If the rollover comes from a traditional account, the rollover is called a conversion, and the amount will be included in your current taxable income. You can make a Roth IRA rollover via a direct trustee-to-trustee transfer, or you can roll over a distribution you receive from an eligible account within 60 days after the distribution. Rollovers from a Roth IRA can be made only to another Roth IRA.
The rules for Roth TSP rollovers are similar to those for Roth IRAs, with these three exceptions:
- The rollover must be made as a trustee-to-trustee transfer.
- You cannot roll a Roth IRA into a TSP Roth.
- You cannot roll funds from your traditional TSP to your Roth TSP
Distributions From a Roth IRA
You can distribute contributions to your Roth IRA at any time without tax or penalty. Distributions of earnings from your Roth IRA are taxable if they occur within five years of the initial deposit to the Roth IRA. If applicable, separate five-year periods apply to each rollover and conversion. Earnings distributed to you or your beneficiaries before age 59 ½ are subject to taxes and a 10-percent early-withdrawal penalty unless:
- You die.
- You become disabled.
- You use the proceeds to buy or build your first home (up to a $ 10,000-lifetime limit).
- The distribution is one of a series of substantially equal payments.
- You have unreimbursed medical expenses exceeding 7.5 percent (or 10 percent if under age 65) of your adjusted gross income.
- You use the distribution to pay medical insurance premiums while unemployed.
- You use the distribution to pay qualified higher-education expenses.
- The IRS levies you.
- You qualify for a reservist distribution.
If you withdraw an amount from a Roth IRA that exceeds your contributions, the amount will be treated in the following sequence for purposes of determining taxes and penalties:
- As regular contributions.
- As conversions and rollovers (disregard Roth IRA to Roth IRA rollovers) in which the taxable portion, if any, is taken first, followed by the nontaxable portion.
- As earnings on contributions.
Distributions from a Roth TSP
In general, Roth TSP distribution regulations mirror those for Roth IRAs, including the five-year rule. However, there are some differences in the exceptions to the tax and penalty on earnings distributions before age 59 ½. The exceptions do not include medical insurance, education expenses and IRS levies, but do include separation from service at age 55 (or 50 if you are a public safety employee) and domestic relations court orders.
The TSP administrator is obliged to withhold taxes on taxable distributions, including Roth TSP distribution from earnings that do not qualify for a penalty exception. The withholding rate is 10 percent or 20 percent, depending on the circumstances. You may be able to change or waive the withholding amount under certain circumstances.
If you have both a traditional and Roth TSP, all distributions are taken proportionately. For example, suppose you have 60 percent of your TSP funds in a traditional account and 40 percent in a Roth. If you decide to withdraw $10,000, $6,000 will be taken from your traditional account and $4,000 from your Roth TSP.
Unlike a Roth IRA, you must begin taking minimum required distributions from a Roth TSP starting at age 70 ½.
Roth IRA Versus Roth TSP: Other Differences
Certain other differences exist between Roth IRA and Roth TSP accounts:
- Loans: You can borrow from your Roth TSP up to the amount of your contributions and the earnings on those contributions. You cannot borrow employer contributions or earnings. You will be charged interest on the loan, but the interest you pay goes back into your account. You generally have from one-to-five years to repay the loan (one-to-15 years if used to buy or build a primary residence), or else the unpaid balance will be treated as a distribution. Loans from a Roth IRA are not allowed.
- Recharacterization: You can recharacterize contributions to your traditional IRA as Roth IRA contributions, and vice versa. Recharacterizations between traditional and Roth TSP accounts are not allowed.