To Roth or Not to Roth

By MC1 Kegan Kay, NAS Sigonella Public Affairs

It’s time for the second installment of our financial competency series to help everyone gain a better understanding and control of their financial situation.

Last time we covered planning for retirement, we focused on the Thrift Savings Plan (TSP) for service members. In this issue, we are going to discuss two different types of accounts you can put your retirement contributions in: Traditional TSP and Roth TSP.

The first thing to understand when choosing between Traditional TSP or Roth TSP is that there is no right or wrong decision—it is a personal choice. No one but you can decide which one account (or both) to put your contributions toward.

The main difference between Traditional and Roth is all about taxes. In the Traditional TSP, you make your contributions before taxes are taken out, which means you’ll pay taxes when you withdraw your money. In the Roth TSP, you pay the taxes up front when you contribute, so during retirement, you’ll receive qualified Roth distributions tax-free.

To put it simply – with Traditional you pay taxes later, and with Roth you’ll pay taxes now.

However, there are some important details and exceptions to be aware of. The TSP website, tsp.gov, provides a caveat regarding Roth contributions: “Roth earnings become tax-free when 5 years have passed since January 1 of the year you made your first Roth contribution and you have reached age 59½, have a permanent disability, or have died.”

For service members deployed to tax-free zones, contributions during this time are treated differently. Traditional contributions go in tax-free but all of the growth will be taxed. Roth contributions go in tax-free and the growth will never be taxed. It’s also important to note that if you are enrolled in the Blended Retirement System, the matching contributions from the government will always go into Traditional TSP whether or not you put your contributions into Roth.

Keep in mind IRS has set annual limits for all retirement accounts including TSP, so for details about the annual limit, special limits or additional limits for combat zones, please visit the TSP.gov

As a reminder from the previous article, to manage your contribution amount and account type, use your MyPay account.

Now, let’s move on to where your contributions within those accounts are invested. TSP contributions are invested in either stock funds or lifecycle funds.

When it comes to investing, there is always some risk involved, and that is no different when investing in stock funds through TSP. The difference comes down to the amount of risk you are comfortable with.

TSP offers five different stock funds. From least to most risky, they are: G Fund, F Fund, C Fund, S Fund and I Fund.

When it comes to investing money, it’s often true that the “bigger the risk, bigger the reward,” as Greyson Chance said. At the same time, it’s also true that “the higher the climb, the harder the fall.”

This is where the Lifecycle Funds come into play. A TSP Lifecycle Fund is a diversified mix of the five core funds we just went over. The purpose of the ten available lifecycle funds are to let you invest your entire portfolio and get the best expected return for the amount of expected risk that is appropriate for you.

Lifecycle Funds are broken up based on the contributor’s potential retirement date. The current available LFs are L Income, L 2025, L 2030, L 2035, 2040, L 2045, L 2050, L 2055, L 2060, L 2065.

Basically, the further out your potential retirement date is, the riskier the Lifecycle Fund portfolio will be. When you have more years until you plan to remove funds from TSP, the Lifecycle Fund will invest more of your money in the C, S and I Funds for the potential higher returns while maintaining time to recover if there are losses. The closer you get to your retirement date, the safer the fund becomes by moving more of your contribution into the G and F Funds so there is less risk of losing your retirement savings by the time you are ready to withdraw.

Once again, the best choice of investment all comes down to personal choice and how much you are willing to risk. Only you can make this choice!

Remember, the only way to manage your choice of Fund and contribution is to access your TSP account. From there you’ll be able to choose and determine the percentage amount of your contribution go into which fund(s).

If you have questions regarding TSP or other financial concerns, please reach out to your command financial specialist or to Fleet and Family Support Center to speak to a personal financial manager to assist you.

TSP Funds

The G Fund is a Government Securities Investment Fund, which are specially issued to the TSP. In this fund, money from contributions cannot be lost and has a consistent but low investment return. The risk with this fund is that money invested into it may not grow to meet your projected retirement needs or outpace inflation.

If you haven’t looked at your TSP account since boot camp or have never looked at your TSP, then your contributions are probably going to the G Fund.

The F Fund is a Fixed Income Index Investment Fund, which means government, corporate and asset-backed bonds. This fund may earn higher returns than money market funds over long term with low risk. The risk with this fund is that bond prices fall when interest rates rise and the bonds can be repaid early, reducing your returns.

The C Fund is a Common Stock Index Investment Fund, which are stocks of large and medium-sized U.S. companies. Investing the C Fund has a potential for high investment returns over the long term but the risks are based on stock market performance and therefore could potentially be very volatile.

The S Fund is a Small Capitalization Stock Index Investment Fund, which are stocks of small to medium-sized U.S. Companies. Like the C Fund, the S Fund has the potential for high investment returns over the long term, but it too is dependent upon stock market performance.

The I Fund is an International Stock Index Investment Fund, which are International stocks from more than 20 developed countries. Once again, like the C and S Funds, the I Fund has potential for high investment returns over long term but is based on stock market performance so it can be volatile.