Roth TSP vs Traditional TSP (TSP Explained) - YouTube

There's really only one difference between  a roth tsp and a traditional tsp and which  

one is better. And that's going to be income  tax. A roth means you're going to pay taxes now  

and traditional means you're going  to pay the taxes later. And to answer  

which one's going to be better is...  well whichever way you're going have  

to pay less taxes. And in this video I'm  going to show you how to figure that out.

I'm Tim Wolffe, welcome to my channel. If you  wanna see more tsp videos please go ahead hit  

the SUBSCRIBE button and if you get any value out  of this video it helps a lot if you hit the LIKE  

button. When it comes to tsp I get a lot of common  questions. At the very end of the video stick  

around and I'll answer some of those questions.  So first things first, if the major difference  

between roth and traditional is income tax- well  what changes income tax? Income! The more income  

you make the more you're going to pay in taxes,  the less income you make the less you're going  

to pay in taxes. So traditional you pay the  taxes later, roth you're paying the taxes now.  

So are you going to have less income later in  retirement or right now? Whichever is going to  

be less is where you should pay the taxes. If  you're going to retire making more money... in  

other words retiring "better off" then it would be  more beneficial for you to do the roth. But if you  

think your retirement income is going to be less  than what you're making right now, then hold off  

on paying taxes until you retire. That way when  you're making less income in retirement you'll pay  

less taxes. That would be very common for someone  who just wants to retire on like a small military  

pension or is just dependent on social security.  You're probably not going to be able to make up  

the same amount of income you're making now so  traditional would be better for you. A traditional  

tsp would also be better if you start investing  really late in other words, within about 15 years  

of retirement typically that's when you see the  breaking point of you should just do traditional.  

Or if you're only going to invest less than five  percent of your income- you're still going to make  

a decent amount of money in your tsp but probably  not enough to generate more income than you make  

right now. Anyone who starts investing early  and often is the best candidate for the roth. If  

you're young and you're just starting your career  out in federal employment and military the roth  

is going to be an awesome choice for you because  you're going to have so much money built up by  

compound interest within your tsp you're probably  going to retire better off. It's important though  

to understand the difference between roth  and traditional, why they are the same,  

and how they can be different. Really quick here's  the numbers for you guys, I know this is a little  

bit boring but it's important that you actually  understand it. So let's take tom and jerry for  

example. Tom is going to invest in the traditional  tsp and jerry is going to invest in the roth tsp.  

Both tom and jerry make the same amount of money  every year. They make $50,000 a year. Traditional  

tom goes ahead and invests right away, before  taxes, because he's going to pay the taxes later.  

So he invests 10 percent. Whereas jerry who's  investing in the roth pays taxes first so he's  

going to pay his 20% in taxes now, leaving him  with a net income of $40,000. After traditional  

tom has invested his 10 percent he's going to have  a taxable income of $45,000. He's then going to  

pay his 20% tax... remember this is after he  already invested and he's going to take home  

$36,000. Jerry on the other hand is going to  invest after the taxes have been taken out  

so he'll put his 10 percent away into the roth  tsp and he'll take home the same amount which is  

$36,000. And this even applies over a long period  of time, say traditional tom continued to invest  

$5,000 a year which is about $416 a month and roth  jerry continued to invest $4,000 a year (after  

tax), which is about $333 a month. If they both  do this from age 25 to age 60 and they make 10%  

on their money = roth jerry will retire with 1.26  million dollars and traditional tom will retire  

with 1.581 million dollars in his account  but he opted to pay taxes later so  

during retirement if he wants to withdraw that 1.5  million after tax it's going to be 1.26 million.  

The exact same amount as roth jerry. So now that  we got the numbers out of the way and if you don't  

understand that that's fine just take away this-  if your income tax remains the same, traditional  

tsp and roth tsp are the same thing. But it's  very rare that your income tax is going to stay  

the same. So we need to play this game and make  the decision of well is my income tax going to be  

higher or lower during retirement. Like I  mentioned earlier , I would use that 15 year  

buffer, if you're starting late within 15 years  of retiring. So if you're going to retire age  

60 and you're already age 45 and you have done  nothing to save for retirement then it's probably  

better for you to just do the traditional. But if  you're younger than that, you're investing early  

and you're going to do more than five percent  of your salary (I recommend at least 15% of your  

salary into the tsp) then roth is going to be a  phenomenal option for you. Because it's going to  

save you tons of tax money. And a bonus reason why  the roth tsp is awesome is because when you retire  

or when you leave federal employment or get out of  the military you should always transfer your tsp  

into an individual retirement account (An IRA).  Your traditional tsp goes into a traditional ira  

and your roth tsp goes into a roth ira. It's  simple, it's a free transfer. So once you've  

left with the roth tsp you can transfer to a roth  ira. A roth ira is the most beneficial retirement  

account out there. It has special advantages  that no other retirement account has. Like no  

required minimum distributions (RMDs). Every  other retirement account requires that at age  

72 you start taking distributions of around four  percent and it goes up to about eight percent.  

With a roth ira there are no required minimum  distributions. Which just means it's one less way  

for the government to tell you how to handle your  money. Another benefit to the roth is when you  

die whoever inherits that account doesn't have to  pay any taxes. What's in there is what they get,  

it makes the process a lot easier for them. And  one last benefit I'll share with you- when you do  

the roth, you know exactly how much you're going  to pay in taxes because you're paying them this  

year. You're opting to pay taxes now so you don't  have to pay the taxes later. with traditional on  

the other hand, when you opt to pay the taxes  later we're not really sure what tax rates are  

going to be like in 20, 30, 40 years. America  is in 28 trillion dollars of debt and counting.  

The tax rates could go up. By doing the roth you  take that unknown risk out of play. And to finish  

up the video I have some really common questions  that I get asked a lot. When it comes to tsp you  

do not have to invest in a traditional tsp to get  the match from the government. You can do all of  

your own money in a roth tsp. You'll still get the  match but theirs has to always go into traditional  

tsp because they're not going to pay your taxes  for you. And yes you can do both if you want.  

However you break it down the maximum you can  contribute into the tsp is $19,500 and that does  

not include the government match, that's just your  own contributions from your own salary. If you're  

in the military but you're not in the blended  retirement system you can still do the tsp roth  

or traditional. You can do either but you will not  get the five percent government match. And if you  

guys have any more questions please COMMENT them  down below, I'll be happy to answer them for you.  

Guys go ahead SUBSCRIBE if you're not so you don't  miss any other videos about personal finance,  

tsp, and investing. And I'll see you guys again on  monday for next week's video! Thanks for watching!