Roth TSP vs. Roth IRA: What's the Difference?

Both are funded with after-tax dollars, but one is much more exclusive

Updated on June 30, 2022

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Both Thrift Savings Plans (TSPs) and individual retirement accounts (IRA) come in Roth versions. For both Roth TSPs and Roth IRAs, the contributions are not tax-deductible and the withdrawals in retirement are tax-free. However, Roth TSPs are employer-sponsored plans and they’re subject to different rules and limits than Roth IRAs.

Let’s explore the differences between these two accounts—plus, if you’re eligible, how you may be able to use both to save for retirement.

What’s the Difference Between a Roth TSP and a Roth IRA?

	Roth TSP	Roth IRA
Plan Type	Employer sponsored	Individually owned
Eligibility	Federal employees and members of the military	All taxpayers who meet income limits
Contribution Limits	$20,500 plus employer contributions	Up to $6,000 (plus an extra $1,000 if you’re age 50 or older) based on income and tax filing status
Employer Contributions	1% automatic contributions plus matching contributions	n/a
Investments	Menu selected by employer	Anything except life insurance and collectibles
Loans	Available	Prohibited
RMDs	Yes	No
Taxes	After-tax contributions; tax-free withdrawals in retirement	After-tax contributions; tax-free withdrawals in retirement

Plan Type and Eligibility

A Roth IRA is an individual retirement account. Roth IRAs are available to all taxpayers with earned income. However, eligibility to contribute to a Roth IRA is limited based on income and tax filing status. For example, single filers must make less than $144,000 in 2022 to qualify to contribute to a Roth IRA.

A TSP is a retirement savings plan sponsored by the federal government. It’s only available to federal employees and members of the military. TSPs are similar to 401(k) plans sponsored by private companies and employees are allowed to make two kinds of contributions:

Traditional: Taxes on these contributions and their earnings are deferred until you withdraw funds.
Roth: Contributions are made with after-tax dollars and withdrawals in retirement are tax-free.

Note

If you make both traditional and Roth contributions to your TSP, the account will hold two “pots” of money to keep those balances separate.

Contribution Limits

In 2022, the most you can contribute to all IRAs, including Roth IRAs, is $6,000. If you’re over age 50, you can contribute an extra $1,000. However, the amount you can contribute is reduced if your modified adjusted gross income (MAGI) is over a certain threshold. For 2022, these thresholds are $204,000 for married couples filing jointly and $129,000 for single filers.

TSP plan participants can contribute up to the lesser of $20,500 or their total compensation in 2022. Participants over age 50 can contribute an additional $6,500.

Employer Contributions

A Roth IRA isn’t an employer-sponsored retirement plan, so your employer won’t contribute to it.

A TSP is eligible for two kinds of employer contributions, which are known as agency/service contributions:

Automatic contributions: The federal government contributes an amount equal to 1% of the employee’s basic pay each pay period, even if the employee doesn’t contribute to their TSP.
Matching contributions: Employee contributions are matched up to 5% of their basic pay. Contributions are matched dollar for dollar on the first 3%, and at 50% for the next 2%.

For example, say your basic pay is $75,000. The automatic contribution would be 1% of $75,000 ($750). If you contribute 5% of your basic pay ($3,750), the matching contribution would be dollar for dollar on the first 3% ($2,250) plus half of the remaining 2% (which works out to $750). Between your contribution and the government’s contributions, your TSP balance would increase by $7,500 or 10% of your basic pay each pay period.

Note

The employer contributions are placed into the traditional “pot” in your account, even if you typically make Roth TSP contributions.

Investments

The TSP offers a menu of low-cost lifestyle and individual funds. Lifestyle funds include a mix of stocks, bonds, and government securities. TSPs have a target retirement date and are managed more aggressively in their early years and more conservatively as the target date approaches. If you prefer to choose your own investments, you can pick from a selection of individual funds that includes bonds, government securities, and stocks.

Roth IRAs are very flexible and can hold investments in anything other than life insurance and collectibles, including fine art or wine. Roth IRA investments can include cryptocurrency, like Bitcoin. You can manage your Roth IRA investment strategy to reflect your goals and change it as you approach retirement.

Loans

Loans are not available from Roth IRAs. However, you can withdraw your contributions at any time without paying penalties or taxes since you contributed after-tax dollars.

The TSP allows two types of loans:

General-purpose loans: This type of loan comes with no restrictions on how you spend the money, but you must repay it within five years.
Residential loans: This type of loan must be used to purchase or build a primary residence. It requires documentation and must be repaid within 15 years.

To borrow from your TSP, you must meet eligibility criteria and adhere to minimum and maximum borrowing limits. You can only borrow up to the amount of your contributions—not any automatic or matching contributions from your employer. You’ll repay the loan with interest, which will be contributed back to your TSP.

Required Minimum Distributions

Both traditional and Roth TSPs are subject to required minimum distributions (RMDs). Beginning at age 72, you’ll have to withdraw at least a minimum amount based on your life expectancy.

Roth IRAs do not require RMDs.

Taxes

Roth TSPs and Roth IRAs are taxed in the same way. Contributions are not tax-deductible; instead, they are made with after-tax dollars. The big tax advantage comes when you take distributions in retirement. As long as you’re over age 59 ½ and your account is at least five years old, qualified distributions from Roth TSPs and Roth IRAs are tax-free, including all of the interest and investment gains. Contributions to a Roth TSP or Roth IRA can be withdrawn anytime without taxes or penalties.

Employer contributions are always added to the traditional balance of your TSP account, even if you only make Roth TSP contributions yourself. The distributions from the traditional balance of the TSP are taxed as ordinary income.

Special Considerations

Members of the military who receive tax-exempt pay, such as pay that is subject to the combat zone tax exclusion, can make tax-exempt contributions from that pay to their Roth TSP. The earnings on those contributions will also be tax-exempt at withdrawal.

Which Is Right For You?

If you have access to a TSP, it’s a good idea to start with it because, like a 401(k), this employer-sponsored plan offers matching contributions. It’s hard to argue with “free” money. TSP contribution limits are substantially higher than those for Roth IRAs, and they’re not affected by your income.

The advantage of a Roth IRA is its flexibility in terms of the investments you can choose. The TSP has a limited menu of investment options but you can invest your Roth IRA funds in anything other than life insurance and collectibles.

A Best-of-Both-Worlds Option

Contributing to a TSP doesn’t prevent you from also contributing to a Roth IRA. If you’ve maximized your matching contributions to a Roth TSP and still have money you want to invest toward retirement, you can also contribute to a Roth IRA—as long as you meet its income requirements.

The Bottom Line

A Roth TSP and Roth IRA both offer the advantage of tax-free income in retirement. They’re also flexible because you can withdraw your contributions anytime without penalty. A Roth TSP offers higher contribution limits and employer contributions. For most people who have access to a Roth TSP, it may be a better choice than a Roth IRA.

Frequently Asked Questions (FAQs)

Should I roll over my TSP to a Roth IRA?

The TSP offers a menu of low-cost investment options. Before you roll over your funds to a Roth IRA, you should consider whether the new investment choices would be a better fit for your retirement goals. Compare the fees and expenses—are they worth any additional flexibility? If you’re considering a rollover to purchase an annuity, make sure you understand the features, benefits, and cost before you make a decision.

What is the difference between a traditional and a Roth TSP?

Contributions to a traditional TSP are tax-deductible and distributions are taxable income. Contributions to a Roth TSP aren’t tax-deductible, and distributions, after you’ve reached age 59½ and had the account for five years, are tax-free. Your contributions to a Roth TSP (but not any employer contributions) can be withdrawn anytime without tax or penalty. All withdrawals from a traditional TSP are taxable and may be subject to a penalty if made before age 59½.

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