Roth vs. Pretax TSP: How Should You Save for Retirement

Saving in a Roth TSP means contributing money that has already been taxed. This allows your investment gains and withdrawals later in retirement to be tax-free. Some key potential advantages of picking the Roth TSP include:

• Tax-free withdrawals in retirement, allowing you to avoid rising income taxes later in life. This can maximize withdrawals if you anticipate being in a higher tax bracket in the future. 

• The ability to withdraw contributions at any time without needing to pay additional income taxes or penalties since taxes were paid upfront. This provides more flexibility.

• Possibly being subject to fewer taxes on Social Security benefits in retirement as your taxable income is lower.

On the other side, sticking with pretax TSP contributions can make more financial sense depending on your situation: 

• You receive immediate tax savings from the reduction in your current income taxes owed by contributing pretax dollars. This equates to more money that can be invested and growing.

• If needed, you can transfer pretax TSP money into a Roth IRA down the road and pay taxes then. This tactic, known as a Roth conversion ladder, allows you to make optimal decisions later while saving on taxes now.

There are several nuances to evaluate, but your planned Federal retirement timing can tip the scales. If retiring early with decades still to go, the Roth TSP often generates bigger long-run gains. But if retiring in your peak earning years soon, maximizing immediate tax savings with the traditional TSP may pay off more instead.