Saving for retirement is one goal commonly shared by most individuals. Unless you are independently wealthy or inherit enough money to feel confident you will never have to rely on savings (I did not either one of these), you most likely want to put money aside during your working years to ensure your comfort and security when you retire. This can be done in any number of ways, as there are dozens of different "types" of retirement savings plans from which to choose. Each plan has its own benefits and drawbacks, making it important to find the one that best meets your current and long term financial needs. Members of the military and federal employees have additional savings tools at their disposal, making the decision where to save even more complicated. Here we look at two popular savings plans available to service members, their families, and United States Federal Government employees.
Roth IRA: After-Tax Today for Tax-Free Later
A Roth IRA is available to any individual or married couple that falls under the income thresholds established by the IRS. To be eligible as a contributor to a Roth IRA, you must make contributions from taxable compensation such as that received from self-employment, wages, salaries, commissions and bonuses. Members of the military, government and civilians have access to a Roth IRA if they meet the required conditions.
Roth IRA contributions are made with after-tax dollars, meaning the account owner will never again pay income tax on contributions or earnings when taking them as qualified distributions. Qualified distributions include the withdrawal of contributions at any time and earnings after the account is open for five tax years and the owner is 59 1/2 years of age. This is very beneficial to individuals who may find themselves in a higher tax bracket when distributions are taken, as income tax has already been paid and no further taxation will occur.
Thrift Savings Plans
Available to service members and federal employees, the Federal Thrift Savings Plan is another option to consider for retirement savings. This plan commonly recognized by its acronym TSP, is similar to the standard 401k with which most savers are familiar. Different from the Roth IRA in many ways, contributions to the TSP are made with pre-tax dollars which reduces the amount of taxable income in the year contributions are made. Of course, since taxes have not been paid on contributions, distributions from the TSP will be taxed. If you are in a higher income tax bracket when money is withdrawn, this can be a disadvantage.
Differences Between the Two
The differences between the two plans do not end at how they are taxes. Consider the following to help aid in your decision as to which plan is best for your financial needs.
Contribution limits: You can contribution up to $16,500 per year in the TSP, versus $5,000 per year in the Roth IRA (For 2010).
Minimum withdrawal age: TSP account owners must be 59 1/2 years of age to avoid early withdrawal penalties for distributions. Roth IRA owners may withdrawal contributions at any age without penalty and earnings after age 59 1/2.
Required minimum distributions (RMD): Minimum mandatory distributions must be taken from TSP at age 70 1/2 compared to the Roth IRA which has no such requirement. Failure to take the minimum required distribution results in a 50% penalty from the IRS.
Which One Did I Do?
Throughout my nine-year military career, I had access to both the Roth IRA and TSP. Since I was only in the National Guard, I started with the Roth IRA, because I had more control over my investments. The TSP didn't really become a viable option for me until I was deployed in 2005. Even though I could have socked away a ton of cash into it, I still opted to max out mine and my wife's Roth IRA. Between that and really upping our emergency funds, we decided to pass on the TSP. Personally, I liked the control of the Roth IRA -- I could buy what I wanted -- and the potentially to have a tax-free nest egg waiting for me at retirement.
For active duty, the TSP might be more attractive since you can have it directly pulled out of your paycheck. The point of it all is that it's never a bad thing to save. TSP or Roth -- you just need to make sure you're saving something for retirement. Both offer distinct advantages and in some cases disadvantages. Soldiers who have access to both a Roth IRA and TSP may benefit by first maxing out contributions to a Roth IRA and then putting additional savings in the TSP to gain the most benefits from both plans.
Jeff Rose is an Iraqi combat veteran and Certified Financial Planner Professional who runs the well known financial planning blog Good Financial Cents. He is also working on his first book by combining the discipline of his Army training with the rigors of his financial planning experience to help people take control of their life and money. You can read more about it at Soldier of Finance.