Should Federal Employees Withdraw From Traditional Or Roth TSP First In Retirement?

This is one of the things that not many people talk about, but that will make a big difference in retirement. That makes a big difference in how long your TSP lasts and how much tax you pay. I don’t understand why others don’t talk about it more.

Training wheels

This article will help you save money and get more control over your taxes and retirement. However, this strategy has different levels.

Using the basic strategy will give you results, and using the advanced strategy will give you better results. Simple like that.

However, not everyone actually uses advanced strategies, so we’ll start with the basic ones.

Basic Strategy: Get Ross on Board!

The basic strategy is simple. First, don’t touch Roth (TSP or IRA).

There are always some exceptions, but as a general rule most people should start withdrawing from their pre-tax (traditional) account first. This includes his traditional TSP and traditional IRA.

Here’s an example that shows why.

Let’s say you have $300,000 in a traditional Thrift Savings Plan account and $300,000 in a Roth TSP account (a total of $600,000), and you’ve just retired and need to start withdrawing your money. But which account should you send from first?

So if you had a choice (you could), which account would you like to grow to $500,000?

If you get $200,000 worth of growth on the traditional side, that entire $200,000 is taxable when it happens. If $200,000 of growth happened on Roth’s side, that entire $200,000 would be tax free!!

If that’s not a good enough reason, are there three more good reasons to go the traditional way in the first place?

1. Tax rates are rising

Tax rates are likely to increase in the future, so if you have a large amount of Roth money in the future, you will be set to succeed.

2. Escape the RMD

Legacy accounts are eligible for RMD (Minimum Required Distribution). This means governments will start requiring money to be withdrawn (and taxes paid) from traditional accounts. For most people, RMD begins between her 73 and her 75 years.

Roth accounts are exempt from RMD, giving you more control over your money and life.

3. Make kids happy

If your child inherits a pre-tax account, you will have to pay taxes on the money, but when you get a Roth account, it’s all tax-free.

advanced strategy

If you’re ready to take your training wheels off, here’s an advanced strategy.

In a nutshell, these accounts should be invested more carefully than the Roth account as we plan to use the traditional accounts first. In other words, you don’t plan to use your Roth accounts for a while, so you should invest more aggressively in these accounts.

But as you may know, this strategy must be executed in an IRA, as TSPs cannot invest differently on the Roth side and the traditional side.

And for those familiar with the bucket strategy (it’s a strategy on how to invest after retirement. Here’s a quick video if you’re not familiar), which makes a lot of sense.

At the end of the day, short-term funding jobs for some of us are safe, while long-term funding jobs are to grow.