Roth IRA vs TSP/401K

[Hawkeye]

Good afternoon everybody! I have a question in regards to opening up a Roth IRA vs contributing to my Thrift Savings Plan. I currently contribute 10% of my income to my TSP. I recieve the 5% matching contribution. I have a couple hundred dollars more I would like to invest each month. Is it best to increase my TSP contribution and put the money in there or should I open up a Roth IRA? What are the differences between the two? I am 25 and just want to hit the recomended 15% that should be set aside for retirement. Thank you for your time!

[disneysteve]

I would put the excess above what is matched into a Roth. Roths offer a number of advantages. You have full control over how and where the money is invested. The money is tax-free in retirement which helps protect you from future tax increases. There is no minimum withdrawal required so you can take out as much or as little as you need when the time comes.

[Hawkeye]

Thanks Disneysteve! You are a great asset to this board.

So should I drop down my TSP contribution to 5% and keep it at that until I max out the Roth and then re-up my TSP contribution if I hit the max on the Roth? I don't know if I will be able to max it out at this point.

[disneysteve]

The general advice is to invest enough in an employer plan to get the full company match, then shift to a Roth. Then, if there is still money available, go back to the employer plan.

[bjl584]

I agree that you can't go wrong with a ROTH.

Something to ad,
Do you have an adequate Emergeny Fund? If not, focus on that before opening up a ROTH IRA.

[jpg7n16]

What are the differences between the two?

This is the main difference:

The TSP account lets you put money aside and not be taxed today. But you will be taxed when you withdraw later in life.

The Roth account, does not let you save on taxed today. But all your withdrawals later in life will be tax free.

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So for a TSP, you may contribute say $5000 and you would have no taxes due. This money would grow and grow to say $100,000 (7.77%) Then you would be taxed on the withdrawals at say 25% overall taxes for a total value of 75,000

In the Roth, you would first be taxed on that $5000 at say 25% leaving you with $3,750 (5000-1250of taxes) to invest. That money invested at the same rate of return grows to $75,000 - which you can then withdraw tax free.

So when the taxes are equivalent, the amounts are equivalent.

If you feel the taxes will be lower today - you'd want to go ahead and pay them now and withdraw tax free later (Roth); but if you feel that your taxes are higher today than they will be later in life you'd want to postpone taxes today, and instead pay when you withdraw (TSP)


This is why we usually recommend that anyone in lower tax brackets today should invest in a Roth before maxing out the 401k/TSP/403b type accounts. Which you're likely in that category.

But you should always take the match 1st. $2 taxable is better than $1 tax free.