Transferring a part of your savings into a Roth individual retirement account could be advantageous for some service employees (Roth IRA). As it offers a versatile investment vehicle with larger tax advantages, a Roth IRA can frequently be a better option than a 401(k) retirement plan—especially if you anticipate being in a higher tax bracket in the future.
Benefits of a Roth TSP
A Roth TSP is a fantastic place to start your retirement savings since it has many benefits. These consist of
Low costs Index funds in a TSP have an expense ratio that varies from 0. 043 percent to 0. 053 percent. In other words, you’re only paying, at most, 43 cents annually for every $1,000 in your account. The Investment Company Institute estimates that the sector average for index funds was 0. 06 percent, or 60 cents annually, in 2020.
No income limitations – If you make more than $144,000 as a single person or more than $214,000 as a couple filing jointly, your eligibility to make contributions to a Roth IRA phases out. Contrarily, there are no income restrictions with a Roth TSP.
Ability to borrow money – A TSP enables you to borrow money that you must repay with interest over a one- to five-year period. 13 IRAs are not eligible for a lending option.
Greater contribution cap – For 2022, you may contribute up to $20,500 to a TSP, which applies to both regular and Roth funds. If you are 50 years old or older, you may contribute up to $27,000.
2 In contrast, the maximum contribution to an IRA is a mere $6,000 ($7,000 if you are eligible for the catch-up provision).
Why Military Personnel ought to Open a Roth IRA?
In addition to the already mentioned tax benefits, there are three more reasons why military members should think about opening a Roth IRA as a retirement planning alternative.
Military employees can request contribution extensions, make Roth IRA deposits with non-taxable income, resulting in tax-free contributions and withdrawals, and generally have lower tax bands than their cash flow would suggest.
Put non-taxable combat pay into a Roth IRA contribution
Donations to Traditional and Roth IRAs must be made in accordance with IRS guidelines and from taxable income.
As a result, certain service personnel who received non-taxable income from specified combat zones were unable to make Roth IRA contributions.
Military people are now able to make Roth IRA contributions even if they did not pay federal income tax on their income thanks to the Heroes Earned Retirement Opportunities Act, which was recently voted into law (and made retroactive to years after 2003).
This is a huge advantage because using money that has already paid federal income tax is a prerequisite for making contributions to a Roth IRA.
As we’ve already mentioned, Roth IRA contributions are made after taxes, and withdrawals are tax-free.
Some military personnel are now able to make tax-free contributions to their Roth IRAs thanks to the HEROs Act.
A Longer Period to Contribute
Military personnel who are deployed abroad might have more time to make Roth IRA contributions.
With Roth IRAs, you can make contributions anytime between the start of the calendar year and the filing deadline.
A deadline extension of up to 180 days may be granted to military personnel and their wives after they return from a conflict zone, a hazardous duty area, or certain other deployments.
The extension covers filing tax forms, paying taxes, and claiming a tax refund in addition to IRA contributions.
Reduced Tax Rates
Most military personnel make more money than their taxable income would suggest.
Consider the BAH, BAS, and other non-taxable benefits you could be eligible for.
Your monthly non-taxable income could range from $1,000 to $2,000 or more, depending on your position and location.
You are likely in a lower tax band than someone with comparable “total” income because these funds don’t contribute toward your current tax rate.
This is a fantastic opportunity to pay taxes at your current “low” tax rate, fund your Roth with money that has already been taxed, benefit from the growth of your donations without being bound by taxes, and take tax-free withdrawals in retirement.
When your tax bracket is low, making contributions to a Roth IRA nearly always outweighs making contributions to a traditional IRA since the future tax benefit will almost likely be greater than the present tax benefit provided by a traditional IRA.
Conclusion
The majority of U.S. military personnel should contribute enough to a TSP to take full advantage of the plan’s match. But once you get there, you have more choices. Roth IRAs have additional benefits, such as a wider range of investment options and the flexibility to withdraw contributions tax-free at any time.
Frequently asked Questions
Can you contribute to both an IRA and a thrift savings plan (TSP)?
Yes, both types of retirement plans accept contributions from members of the military. For 2022, the maximum TSP and IRA contributions are respectively $20,500 ($27,000 if you’re 50 or older) and $6,000 ($7,000 if you’re 50 or older).
What advantages does a Roth IRA have over a TSP?
Even while a TSP provides several benefits, such as a match on your contributions, some service members may prefer a Roth IRA. Roth IRAs offer more investment alternatives, and even if you’re under age 5912, you may always withdraw contributions tax-free.
