Should Military Members Open a Roth IRA? – Investopedia
Just as many private-sector employees can contribute to a 401(k) plan, active members of the U.S. armed forces have the ability to invest through a thrift savings plan (TSP). While the TSP and Roth TSP have a number of benefits that make them a great starting point for your retirement savings, they’re not the only tax-advantaged options available to you.
Certain service members may actually benefit by putting some of their retirement savings into a Roth individual retirement account (Roth IRA). We’ll look at how these two types of accounts compare with each other and examine when a blended approach is a smart move.
TSPs and individual retirement accounts (IRAs) both come in two variants: traditional and Roth. A traditional account lets you invest pretax dollars, which grow on a tax-deferred basis. You then pay ordinary income taxes on the amount that you withdraw after age 59½. In effect, your main tax benefit is front-loaded. A Roth retirement operates in reverse. While you contribute after-tax dollars, you can generally withdraw your funds tax free after you reach age 59½ (the Roth TSP and Roth IRA also require you to own the account for five years).
This makes the Roth variant extremely desirable for anyone who anticipates being in a higher tax bracket in retirement. Because the military skews younger than the civilian population—and includes a lot of people who will eventually join the private sector—a lot of uniformed personnel are in that category. It’s better to pay the income tax on contributions when you’re in a relatively low bracket so that you can then pull the money out tax free when your income has grown.
A Roth TSP or Roth IRA can be even more rewarding for those making tax-free combat pay. By funding a Roth account with that money, you’re getting a triple tax advantage: tax-free contributions, tax-deferred growth, and tax-free withdrawals in retirement.
Note that with a Roth TSP, the back-loaded tax benefits only apply to your contributions. Any amounts put into your account by the federal government are treated as traditional TSP contributions, meaning that pretax money goes into your account, and all withdrawals of that money are subject to ordinary income tax.
A Roth TSP offers a number of advantages that make it a great starting point for your retirement savings. These include:
Most important is that your contributions are matched by up to 4% of your salary—and that’s on top of the automatic 1% contribution made by the plan. For example, if you invest 5% of your salary, then the plan puts in another 5%, giving you a total contribution of 10%. That’s a powerful way to boost your account balance, especially as those plan contributions have the ability to grow over time. Therefore, it rarely makes sense to direct money toward a Roth IRA until you’ve maximized your match.
Once you’ve reached the cap on TSP matching contributions, some service members opt to contribute additional amounts to a Roth IRA. Here are some of the reasons why you may want to use an IRA.
Directing part of your income toward a Roth IRA is a lot easier if you do it electronically. One way to do that is by creating an allotment, or payroll deduction, through the Defense Finance and Accounting Service (DFAS).
Yes, military members are able to make contributions to both types of retirement accounts. For 2022, you can contribute up to $20,500 ($27,000 if you’re age 50 or older) to a thrift savings plan (TSP) and up to $6,000 ($7,000 if you’re age 50 or older) to an individual retirement account (IRA).
While a TSP has a number of advantages, including a match on your contributions, a Roth IRA may also be a good option for some military personnel. Roth IRAs have more investment options, and you can withdraw contributions tax free anytime, even if you’re younger than 59½.
With a traditional IRA, you contribute pretax dollars but pay ordinary income tax on withdrawals after reaching age 59½. A Roth IRA works in the opposite way. You contribute post-tax dollars but have the ability to make tax-free withdrawals in retirement. Among the other differences is the income requirement for Roth IRAs, which doesn’t exist for the traditional version.
For most members of the U.S. armed forces, your best bet is to contribute enough to a TSP to maximize the plan’s match. Once you’ve hit that point, though, your options open up. Roth IRAs have their own perks, including greater investment choice and the ability to pull out contributions tax free at any time.
U.S. Department of Defense, Military Compensation. “The Blended Retirement System: Defined Contribution (TSP).”
Thrift Savings Plan. “Know Your Limits.”
Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”
Internal Revenue Service. “Traditional and Roth IRAs.”
U.S. Securities and Exchange Commission. “Investor Bulletin: Roth TSP for Uniformed Services Members.”
Council on Foreign Relations. “Demographics of the U.S. Military.”
Internal Revenue Service. “Tax Exclusion for Combat Service.”
Thrift Savings Plan. “Roth and Traditional TSP Contributions.”
Thrift Savings Plan. “Individual Funds.”
Investment Company Institute. “Trends in the Expenses and Fees of Funds, 2020,” Page 2.
Internal Revenue Service. “IRS Announces Changes to Retirement Plans for 2022.”
Thrift Savings Plan. “Summary of the Thrift Savings Plan,” Page 7 (Page 9 of PDF).
Thrift Savings Plan. “Loan Types and Terms.”
Internal Revenue Service. “Retirement Plans FAQs Regarding Loans.”
Thrift Savings Plan. “Lifecycle (L) Funds.”
Thrift Savings Plan. “Before You Withdraw.”
Defense Finance and Accounting Service. “Allotments.”
Internal Revenue Service. “Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs).”
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