The Thrift Savings Plan, a defined contribution plan for federal employees and members of the armed services, works similar to a 401(k) plan. The value of the account is determined by how much you put in, how much your employer matches and the growth of the money while it is invested. You don't pay taxes on your contributions until you make withdrawals. That means you actually received your tax breaks on the front-end. No taxes come out of your deposits, and your account grows tax-deferred. When comparing a Roth TSB vs Roth IRA, it is important to note that you fund Roth TSPs with after-tax dollars, so you don't pay taxes on the back end when you distribute the funds.
Unfortunately, you cannot deduct a contribution to your thrift savings plan on your tax return.
Claiming Your Retirement Savings
A TSP is designed to provide you extra income during retirement. This income is above and beyond your government defined benefit plan, including the Federal Employees' Retirement System or the Civil Service Retirement System. It enables government employees to access some of the same tax benefits that a private business gives its employees with a 401(k).
Deductions, Benefits and Distributions
TSPs offer tax benefits, but not tax deductions. Since your contributions go into the plan without being taxed, you've actually reduced your taxable income by the amount deposited into your TSP. You pay taxes later when you take the money out during retirement. A uniformed services TSP works a little differently if you earn combat pay. The combat pay is tax-exempt, and you only pay tax on the growth of those funds while invested. For example, if you deposited $10,000 in combat pay, the $10,000 is tax-exempt. If the $10,000 grows to $20,000 before you retire and distribute it, the $10,000 increase gets taxed as ordinary income as you distribute it. The initial $10,000 never gets taxed.
With a Roth thrift savings fund, the money grows tax-deferred while in the TSP account. Since you pay taxes on the deposits, you don't pay any taxes when you take a qualified withdrawal, either on the original amount invested – which was taxed on the front-end – or the growth of the investment. The Internal Revenue Service defines a qualified withdrawal as one that occurs after you have participated in the plan for five tax years and that takes place after you reach the age of 59 1/2.
Withdrawing money from your TSP when you retire is called making a distribution. If you have a traditional TSP, simply add your distribution to the amount you make in regular income. If you earn $50,000 in other income in a year and withdraw $5,000 from your TSP, you'll pay taxes on the entire $55,000, less any adjustments on your tax return. If it's a Roth TSP, you can disregard the distribution, since it's already been taxed. You incur a 10 percent early withdrawal penalty if you take money out of the TSP before turning 59 1/2 unless you're permanently disabled, you set up monthly payments based on your life expectancy or you separate from your employment and distribute funds after you reach 55 or older.
Filing Your Taxes
If you do a direct rollover from your TSP to another qualified plan, like a traditional IRA, you do not pay taxes until you eventually distribute the money from the new retirement plan. On the other hand, if you roll over the funds to a Roth TSP, you must pay tax on the amount transferred in the year it was rolled over. You can't roll Roth IRAs into traditional IRAs or TSPs. You can use Form TSP-536 in order to ensure that you have all of the appropriate TSP tax documents on hand.
- Comstock/Stockbyte/Getty Images