Roth TSP vs. Roth IRA

Q: I am cur­rently max­ing out a Roth IRA and want to start a TSP or Roth TSP as well. I just found out that my wife, even though she is a stay at home mom, could start a spousal Roth IRA. I’m assum­ing that open­ing an addi­tional Roth TSP instead of a spousal IRA is smarter because I can invest more than 5k a year into it and get the ben­e­fits of the Roth. How­ever, when I talked to my bank about it, they said to open and max the spousal Roth first then if you have any extra money–open a TSP. Max­ing out two sep­a­rate Roth IRAs and then putting what­ever is left­over into a TSP doesn’t make sense to me. If I open the Roth TSP–I can con­tribute more than $5k earn­ing more com­pound inter­est than if I opened an addi­tional Roth IRA for my wife and was again capped at 5k. Am I wrong?

–John, U.S. Navy

 

A: Max them all! Okay, that’s prob­a­bly too much of the finan­cial plan­ner in me show­ing through. Are you wrong? Well, yes and no. The real­ity is that if you save the same amount and have the same rate of return, the com­pound­ing will work the same — whether you have one Roth account or sev­eral. If you’re famil­iar with spread­sheets, it’s very easy to build one that illus­trates this point. If not, just take my word for it. As to your banker’s thoughts on the sub­ject, they could be moti­vated by the desire for you to set-up an account through the bank.

 

I love the Roth TSP because it’s con­ve­nient, inex­pen­sive and allows you to put away $17,000  in a retire­ment sav­ings vehi­cle that offers the poten­tial to build a nice stash of tax-free dol­lars for retire­ment. I also like that it’s so easy to visit myPay and increase your con­tri­bu­tion rate when you’re pro­moted or get a pay raise.

As you noo­dle on the best way to allo­cate your funds, here are a few things to consider:

 

  • Expenses. Believe it or not the TSP is a very effi­cient way to invest from an expense stand­point. Of course, there are no sales charges with the TSP and the ongo­ing expense ratios of the TSP invest­ments are minis­cule: less than 1/10th of one per­cent. Invest­ments through your banker may come with a hefty sales charge and even low cost exchange traded funds or no-load mutual funds have expenses higher, some­times much higher, than the TSP. Advan­tage Roth TSP.

 

  • Mar­i­tal bal­ance. When one spouse stays at home retire­ment invest­ments are typ­i­cally owned by the one with plans at their employer. Adding a spousal Roth IRA would begin to add some bal­ance to the equa­tion. For some folks this is impor­tant, oth­ers, not so much. If a divorce hap­pens, it’s all likely to be split any­way, but main­tain­ing some bal­ance allows both spouses to feel like they are engaged in the retire­ment plan­ning and sav­ing process. Advan­tage Roth IRA.

 

  • Invest­ment options. Yes, you have to watch expenses and sales charges, but a Roth IRA can com­ple­ment the TSP nicely. The TSP has solid core invest­ment options, but you may want to add some other pieces to your invest­ment port­fo­lio. For exam­ple, within a Roth IRA you could invest in emerg­ing mar­kets stock or bond funds or infla­tion hedge invest­ments like pre­cious met­als or com­mod­ity funds. These are not avail­able in the TSP. Advan­tage Roth IRA.

 

  • Ease of Man­age­ment. Being able to see your invest­ment port­fo­lio all in one place or at least not in a whole bunch of dif­fer­ent places can make it eas­ier to review, assess, and adjust your port­fo­lio. Advan­tage TSP.

The good news is that it sounds like you guys are doing some seri­ous retire­ment sav­ing! In that con­text, it’s hard to go wrong, but hope­fully this pro­vides you with enough infor­ma­tion to make the deci­sion that is right for you and your spouse. Good luck.

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6 responses to “Roth TSP vs. Roth IRA”

  1. I think the new fed­eral reg­u­la­tions that have gone into effect will require that the TSP start inform­ing par­tic­i­pants that the total expenses are higher. To date the only expense dis­cussed is the fee the Thrift Sav­ing Plan admin­is­tra­tor charges par­tic­i­pants to man­age the TSP not the costs asso­ci­ated with the funds that com­prise the TSP invest­ment options. Those funds have expenses that typ­i­cally exceed 1 per­cent. They also don’t dis­cuss the mil­lions assessed to par­tic­i­pants accounts to replace the com­puter sys­tem destroyed when hur­ri­cane Kat­rina flooded the oper­a­tion cen­ter in Louisiana when oper­a­tions were relo­cated to Alabama.

  2. So if I read this cor­rectly, I can max my Roth TSP ($17K) in addi­tion to maxxing both spouses’ Roth IRAs ($5K each)?? It seems too good to be true with the cap on Roth IRAs being $5000 for so long… now all of a sud­den I can throw another $17,000 under the Roth umbrella?

    Can any­one confirm?

    1. My under­stand­ing is that the Roth TSP falls under the reg­u­la­tions sim­i­lar to a Roth 401k, not the Roth IRA. So, you can con­tribute the 17k rather than the 5k.

      1. I asked an IRS employee this and was told that the TSP has noth­ing to do with the Roth IRA lim­its for the gen­eral pub­lic. So, you could max a Roth IRA at Chase Bank ($5,500) and ALSO max your Roth TSP of $17,500 in the same year.

  3. So what tax guid­ance allows both ROTH IRA at Chase and ROTH TSP to be max’d?

    As the IRS rules say, one mem­ber can only have one ROTH account regard­less of the company(ies) man­ag­ing it.

    While all these hearsay (in this case, hear-read) say one or the other, it’d be nice to come to the same con­clu­sion based on fac­tual, evi­dence and source, for 3rd party verification.

    Thank you

  4. From the IRS Website:

    Can I con­tribute the max­i­mum, includ­ing catch-up con­tri­bu­tions, to both a des­ig­nated Roth account and a Roth IRA in the same year?

    Yes. if you are age 50 or older, you can make a con­tri­bu­tion of up to $23,000 in 2013 to your 401(k), 403(b) or gov­ern­men­tal 457(b) plan ($17,500 reg­u­lar and $5,500 catch-up con­tri­bu­tions) and $6,500 to a Roth IRA ($5,500 reg­u­lar and $1,000 catch-up IRA con­tri­bu­tions) for a total of $29,500 for 2013.

    See this URL:
    http://​www​.irs​.gov/​R​e​t​i​r​e​m​e​n​t​-​P​l​a​n​s​/​R​e​t​i​r​e​m​e​n​t​-Pl

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