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Federal Employees Benefits Q &A

Do you have questions about your federal employee CSRS or FERS pension/annuity or federal employee retirement planning? Concerns about your Thrift Savings Plan (TSP) account or what about federal employee pay and leave issues?

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The Q&A forum is moderated by Ed Zurndorfer -- an expert on federal employee benefits -- and a Certified Financial Planner, chartered life underwriter and chartered financial consultant in Maryland.

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#1 Posted : Wednesday, April 24, 2019 6:46:57 PM(UTC)

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I am retired now but I remember shortly before I retired one of my co-workers asked me one day about the Roth TSP vs. the Traditional TSP and asked what I knew about pros and cons, and I had to tell them, to be honest, that since the Roth TSP came along so late in my career that I had never looked into too closely. Now I have been reading about it and to me it looks like, especially if you are a fairly new employee, that you should go with the Roth TSP, if you are looking at maximizing your retirement, because although you get a tax break on the Traditional TSP while you are working and contributing to it, it is just tax deferred, and you will eventually have to pay taxes on that money when you take it out, and also taxes on the interest it has earned during your career.

However, I have been reading that if that money had been put by the employee into the Roth TSP (and the 5% match from the government goes to the Traditional anyway), and as long as it had been in there for at least 5 years and you don't touch it till you are 59 and a half, then all the interest ("earnings"?) on it also comes out completely tax free along with the principle ("contributions")--the principle because the tax has already been paid on it as you were working, but you actually never have to pay taxes on the earnings--tax-free money! To me this would be a big advantage over the Traditional TSP where you have to pay tax on both as you withdraw it, so the only advantage would be if you were in a lower tax bracket when you retire and save that way.

Or am I misunderstanding something here? I would think that over a long career especially, that having all that interest tax-free compared to just tax-deferred could be a lot of money...
Ed Zurndorfer  
#2 Posted : Thursday, May 23, 2019 3:43:39 PM(UTC)
Ed Zurndorfer

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Your understanding is right on target. For those annuitants who expect to be in a higher overall marginal tax bracket (include federal and state) by the time they are withdrawing their TSP accounts, the Roth TSP is more tax advantageous.
thanks 1 user thanked Ed Zurndorfer for this useful post.
mc0111 on 5/23/2019(UTC)
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