Prepare for a worry-free future

The TSP is pre-tax – contributions are deducted from your or your spouse’s paycheck before the taxable income calculation is done. So if you make 40,000 a year, but contribute 6000, you’d only pay tax on 34,000 now. However, when you take the money out, you have to pay your then-current income tax on it. So if you think you will have a low tax bracket in retirement (limited retirement income), then that’s better. On the downside, no taking money out until you are retirement age or you face some pretty serious penalties.

Contributions to a Roth IRA are post-tax. So if you make 40,000 a year, but contribute 6000, you still pay tax on the 40,000. The good news is when you remove money from the Roth in retirement, you pay no tax on the contribution, just on the earnings. The better news is you’re essentially free to take your contributions (not the earnings) out any time after 5 years – don’t have to wait until retirement. So if you put 10,000 into a Roth, and wait 5 years, and it goes up to 15,000, you can take the original 10,000 out, but not the extra 5 – that you have to wait until retirement for.