Chapter 9 of The Informed Fed, "Roth vs. Traditional TSP"

In Chapter 9 of The Informed Fed, titled "Roth vs. Traditional TSP," Jeffrey Roediger and Bryant Stone break down the key differences between these two Thrift Savings Plan options for federal employees. They explain that Roth TSP contributions are taxed upfront but grow tax-free, while traditional TSP contributions are tax-deferred until withdrawal, allowing immediate tax savings. The duo emphasizes that TSP offers higher contribution limits compared to IRAs, with no income restrictions, making it a powerful tool for federal workers. With potential future tax hikes, Bryant suggests Roth TSP could be more beneficial for many employees. Both hosts stress that financial planning is an ongoing process, especially in light of changing tax laws, and encourage listeners to regularly consult with financial advisors to maximize their retirement strategy.

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For additional resources for the federal employee, visit www.myfeduniversity.com
Bryant.Stone@toprankadvisors.com
(919) 300-5870

Transcript

Jeffrey Roediger  0:00  
Man, hello everybody. Welcome back to the informed fed with my guest host and co author of the book, Bryant stone, we're on chapter nine. Uh, welcome back, Bryant,

Unknown Speaker  0:19  
Jeff, how we doing? Man, how's everything?

Jeffrey Roediger  0:21  
Good? Good. We're blowing through this book. This is a this is a topic that gets a lot of questions and is always at the top of surveys that we do. And today we're going to talk about Roth TSP versus the traditional Roth. And it can be confusing, and Brian's here to maybe simplify it for you. Just as a reminder, if you hear any content or you have questions, there are links below, for those of you viewing on YouTube, if you're listening, then we'll give you the the information of where to go to set up a time to to receive a complimentary meeting with Bryant. Also, we'll we'll give you the links at the end here, so hang on until the end, so that you'll know where to go so that we can help you. That's what we do. We're helping federal employees. So, alright, Brian, let's, let's get into this before we start recording you. You said you get this, you have this conversation a lot, correct?

Speaker 1  1:37  
Yeah, we get it a ton. Um, you know, especially over these last couple of years, Jeff, because with the tax cuts and job act getting ready to end in 2026 it's been a huge topic of mine with a lot of people, because they're like, should I contribute to the Roth? Should I not contribute to the Roth taxes are increasing. And, you know, with the Roth TSP specifically. I mean, that's only been around for federal employees since 2012 May 7, to be exact, that's when they started receiving contributions to the Roth TSP. So a lot of the time, Jeff, when I'm speaking to federal employees, I'd say probably a good percentage of them don't even know if there is a Roth inside their tsp. So you know, because you know, once again, since it is so new, and also too, just because, like, you know, a lot of employers in general, you know, do not offer a Roth 401, K. Now that's being more and more of a thing with the, you know, the Define contribution plan, you know, with employers offering the Roth as an option. Because, you know, it allows, just from a very rudimentary standpoint, it allows that employee to pay tax on that money now and then. It allows their earnings on that money to be tax free in the future. That's like the big thing about, you know, contributing to a Roth, right at some point, that money is all going to be tax free. And a reason why someone would contribute to a Roth, I guess the biggest reason is if they feel like their taxes are going to be a lot higher in the future than what they are today. Now, what I tell a lot of my clients, Jeff is it all depends, right? Because, you know, you may be in a situation where your taxes may be a lot lower in the future, dependent upon what your income looks like and you know your situation. Now, what I've been seeing personally in my practice, because we, like I said, you know, I'd say 80% to 85% of our clientele is federal employees. And what I see typically is that they're when we look at everything, and its totality, is that more times than not, I'd say, over the last five years, you know, federal employees taxes are most likely going to be higher in the future, so that so contributing to that Roth is something that's been, you know, more topic of mind, something that we're thinking about implementing. But also Jeff too. You know, you can't discount, you know, the traditional tsp as well, right? Because if you get someone who has, you know, let's say they're teetering a tax bracket, right? Let's say they're teetering the 22 or 24% tax bracket, and if they make a $5,000 contribution to that traditional tsp that brings them down to that 22% tax bracket. That may make some sense, right? You know, something else to kind of mention or bring up is like, you know, if you get someone, let's say they're currently living in a state where they pay. State income tax, right? And they know that they may retire in the future to a state where they may not pay state income tax. And let's say, you know, average state income tax is like 5% right? Just kind of depends upon what state you're in, but I'd say average across the US about 5% so if they know they're going to retire into a state where they're not going to pay any state income tax. You know, maybe contributing to a traditional tsp may make some sense, because they're deferring the tax on that, and then when they retire, they're not going to pay any state income tax on it. Where, whereas if they were to contribute to the Roth, they're paying tax on that money now, so they're paying their federal in their state. So those are kind of things that you know, that you know myself and our team as as advisors try to have the foresight on because that's not something always that you're going to think about, right, Jeff, when you're thinking about your finances, just small nuances like that, that can mean a lot, because if you could save yourself 5% in taxes on a big lump sum. That's that can make a huge difference, right? So there's a lot of different things to consider, you know, not consider, when you're talking about contributing to the Roth TSP, contributing to just a regular, traditional Roth, you know, you know, a big question, or I would say, you know, a big aha moment for a lot of federal employees and people that we speak to is that a lot of them feel like, inside the TSP, there's, there's income limits as far as how much you can contribute to the to the TSP, whether it's traditional or Roth, because, you know, on the outside, if you're just setting up a regular IRA, whether it's traditional or Roth, you know, you're going to have, you're going to have income limits, and you're also going to have contribution limits, you know, and as of 2024 if you want to contribute to a traditional Roth or a traditional IRA, that current limit right now Jeff is 7000 and then if you're above the age of 50, that goes to 8000 because they allow you to do what's called catch up. But if you're inside, and there's also income limits too, right? You know that you can, you know there's certain income limits if you're allowed to contribute to a Roth. And then same thing for the, you know, the traditional IRA, there's income limits where that contribution can be tax deductible. So those are things that you got to think about. But if you're contributing, Jeff, inside your TSP, there are no income limits. Now there are contribution limits. Those contribution limits are a lot higher. It's 23,500 I believe, for 2024, inside the TSP. And then if you're going to do a catch up, it's an additional, I believe, 6500 so it's like a total about 30,000 that you can contribute inside that tsp. So that's something that you may want to know, right? Because I've Jeff, I've spoken and, you know, as you know, I work with a ton of fellow employees, and have been over the years, is that, you know, some of them are only contributing to the contribution limit of what it is on just setting up a normal IRA, not knowing that they can contribute that much more. And they're like, man, I've been doing this for four years. I didn't know I can contribute more than, you know, the 7000 that's allowed, or, you know, if you're over 50, that 8000 that's allowed with a regular IRA. So, you know, there's a lot of things that go into, you know, the the Roth, TSP, the traditional Roth. I mean, with the traditional Roth, you know, something as simple as, if you're under the age of 59, and a half, you're able to take that principle if you need it, let's say, for whatever reason, without being subject to that 10% tax penalty. Not the case. Inside the Roth TSP, you can't take the principal that's inside there because that money isn't what's called are considered a retirement account inside with your employer, so that money is tied up. So yeah, there's, there's a lot of different nuances. You know, a lot of times, Jeff, when I'm sitting down with my clients, and we're kind of evaluating what makes the most sense, I always tell my clients, listen, you know, based on your situation, you know, you should contribute to the traditional tsp this year, or the Roth TSP this year, but that's something that we have to evaluate on a yearly basis, because your income will change. The tax laws will change, as we know, like I said at the beginning, the tax cuts and job act is getting ready to end in 2026 so with those tax rates going up, right? It's like, okay, now, if you're going from a 22 to 25% bracket, what's the best way for you to contribute? Right? Um, because a lot of times you have people who are kind of looking for that cookie cutter answer. Just give me the answer two seconds. You know, the what do they call it the microwave generation, right? Yeah, okay, I just do this until I retired. I'm good, right? I'll be a millionaire. You know, all my problems will be solved. I'm like, No, it doesn't work that way, right? No, we have to continually optimize and monitor as we go along, you know, with your retirement, and kind of be your partner in this. Because, you know, as legislation changes, as you know, the political landscape changes, these are things that it, it can, it requires. Is the word I'm looking for, requires continual optimization. So, so, yeah, there's, there's a lot that goes into that, you know, I can, you know, I can talk on this topic till I'm blue in the face. But does any of that make sense?

Jeffrey Roediger  10:56  
Yeah, I think, you know, I thought that crossed my mind for those listening in or viewing that's why they need an advisor to sit down and work through this on a regular basis, because, you know, a little misunderstanding or not having you know, information is knowledge and knowledge is power. So if you're you're not informed, then you miss out on something that could be a huge, huge financial, huge financial implications down the road, just because you didn't know. And that's something we try to promote, is, as we push out these podcasts and information, is to try to educate people on these types of differences in programs. Because, as you mentioned, somebody could have a Roth TSP, and think I don't, you know, the traditional already got the Roth TSP, but it's different. There's, there's, there's differences that need to be discussed, and that's why they should book a meeting with you, right?

Speaker 1  12:01  
For sure, because, I mean, I and I can keep going on and on, but, like, something that I come across a lot with is, like, you know, some folks do not contribute. They want to contribute to the Roth, but they don't contribute to the Roth because they think they're not going to get the government

Jeffrey Roediger  12:16  
match. There you go, right there. Yeah, I've heard that also, yep, which

Speaker 1  12:21  
is not the case. I mean, they just changed the guidelines this year where, prior, if you had the money in the Roth TSP, it would be subject to required minimum distributions. They recently changed that rule this year, so now it's not subject to requirement, not subject to required minimum distributions. They have another rule coming up in 2026 and I'm gonna kind of just leave that as as a nugget for when you speak to me. But there's all types of stuff, man, that you know that you need to be in the know. And you know you can either find yourself educating yourself and taking advantage of the rules, because it's like, you know, I think I might have said this in a previous episode, Jeff, if you're playing a game, right, and you don't know the rules, how are you going to be effective at the game, right? And too many times, Jeff, people play this game of, you know their finances in this game called life without knowing the rules right, and they find themselves and having, you know, huge tax liens and tax burdens and losing money, and, you know, losing money in the market, and, you know, getting themselves some ridiculous amounts of credit card debt just because they don't know the rules. So, you know, these podcasts, we try to push out content, obviously educate. We're here to educate and help you. And, you know, obviously get you hip to game when it comes a lot of this

Jeffrey Roediger  13:48  
stuff. No, absolutely, I think, you know, usually find out the mistakes you made and now to understand the rules when you get to retire. You know, we're dealing with it with my, my wife's parents right now, they didn't uneducated in some of the decisions they should have made, and it's a burden for everybody else sometimes. So absolutely, I agree 100% so. And speaking of that, chapter 10 is the TSP Modernization Act of 2017 So speaking of rules, right there. So you're going to want to join us when that next episode drops, because there's additional information that you're going to want to be aware of. So very good session today. So bottom line, you need to get with Bryant, and a couple ways you can do that his his link is embedded so you can book a complimentary consultation. Just click the link below if you're listening in go to my fed university.com my fed university.com and go ahead and start. Your retirement roadmap. There's a link right there. You can put it in the comments that you you listen to the podcast, or sell us on YouTube. That'll help us, and we'll direct you over to Brian so that he can get with you and maybe help clarify some of this retirement planning for you. So all right, any closing comments? Brian,

Speaker 1  15:25  
no, just continually educate yourself. Make sure you listen to the podcast. Like comment and subscribe, and we'll see you guys.

Jeffrey Roediger  15:35  
All right. Look for chapter 10 to drop and until next time, thank you.

Unknown Speaker  15:39  
Hey guys. Bye.

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