Roth double whammy

Q: The new mil­i­tary Roth TSP is almost here. I’m con­fused from the infor­ma­tion that I have read, includ­ing the Roth TSP hand­book. How can a per­son put $5k into a nor­mal Roth IRA and then put money into a TSP Roth IRA? So if I under­stand this cor­rect, I can put about $22k into a Roth IRA for myself? Thanks for the help.
–Tom, U.S. Navy

A: I’m glad to hear you’re look­ing at the new Roth TSP and hope a lot more folks are doing the same! Although they share sim­i­lar­i­ties, the Roth TSP is a com­pletely sep­a­rate retire­ment vehi­cle from the Roth IRA. Let’s break it down.

Both the Roth TSP and Roth IRA allow you to add after-tax con­tri­bu­tions (no tax deduc­tion or ben­e­fit today) to a retire­ment account that accu­mu­lates in a tax shel­tered account. At retire­ment, and this is the good part,  both will allow you to poten­tially with­draw your con­tri­bu­tions and earn­ings income tax free. Gen­er­ally, this is after attain­ing age 59 ½ and hav­ing had the account for five years, but there are exceptions.

There are a num­ber of dif­fer­ences between the two Roths. First, Roth IRA con­tri­bu­tions can be removed at any­time with­out taxes or penal­ties. That’s not the case with con­tri­bu­tions to the Roth TSP. Sec­ond, the Roth TSP comes with required min­i­mum dis­tri­b­u­tions at age 70 ½, the Roth IRA does not. Addi­tion­ally, the Roth IRA has income lim­its. For exam­ple, in 2012, if your mod­i­fied AGI exceeds $125,000 ($183,000 mar­ried fil­ing jointly) you can­not con­tribute to a Roth IRA. The Roth TSP does not have any such lim­its. Finally, as you note the con­tri­bu­tion lim­its are dif­fer­ent. Roth con­tri­bu­tions are lim­ited to $5,000 ($6,000 age 50 and over) while the TSP lim­its are much higher, $17,000 ($22,500 age 50 and over).

In both cases, these Roth vehi­cles allow you to add a tax-free com­po­nent to your retire­ment invest­ments. This could be espe­cially help­ful if you end up pay­ing more taxes in the future. All in all, sav­ing money in a Roth account is a bit more pow­er­ful because you are basi­cally pre-paying your retire­ment income taxes when com­pared to Tra­di­tional type pre-tax accounts.

So, if you’re eli­gi­ble to make a Roth IRA con­tri­bu­tion you could actu­ally fully fund both a Roth IRA and the Roth TSP…and that could be a pretty good thing!