How does tsp affect taxes

Therefore, the impact deduction on your paycheck will be greater when making Roth TSP contributions because your take-home pay will be reduced by both the contribution and the taxes on your contribution. A higher AGI means you may lose out on certain tax advantages. You have chosen to keep the impact on your paycheck equal; therefore, your gross pre-tax traditional balance will be higher because the higher contribution percentage allows you to put aside a higher dollar amount and potentially receive a greater return through earnings.

The higher traditional balance may be offset, however, by any income tax you pay on it when you make a withdrawal. The Roth TSP balance, on the other hand, will be tax-free in retirement provided you meet IRS requirements because you paid the taxes on those contributions when you made them during your career. You have chosen the same contribution percentage for Roth and traditional contributions; therefore, the Roth and traditional retirement balances will be the same.

Keep in mind that your traditional TSP balance will be subject to income tax when you withdraw it, but withdrawals from your Roth balance will be tax-free provided you meet the IRS requirements. The benefit of having a tax-free Roth TSP balance in retirement, however, must be weighed against the rate at which those contributions were taxed during your working years and any tax benefits you may have lost out on due to your higher AGI.

Predicting your tax bracket in retirement is the key to determining if Roth TSP or traditional TSP contributions are the right choice for you now. This net after-tax annual income comparison provides a more accurate reflection of whether you might benefit from paying taxes up front Roth TSP or when you withdraw your money traditional TSP. Keep in mind that while a Roth TSP annual income stream may be higher when you withdraw your money, the benefit must be weighed against the rate at which those contributions were taxed during your working years and any tax benefits you may have lost out on due to your higher AGI.

It all comes down to what tax bracket you are in now and which one you think you may fall in while in retirement. Therefore, you may wish to consult a tax advisor to assist you with your retirement planning and contribution decisions. It is not intended to be used as an investment advisory tool or as a guarantee of the duration of the elected installment payment amount. Contribution comparison calculator 1 2 3. Introduction Retirement profile Results.

How many years until you retire? Will you turn age 50 or older this year? That amount will be noted on the Form you receive from the TSP. If you chose a TSP annuity not a very popular choice , the portion of your annuity that was based on your tax exempt contributions would be spread out over your life expectancy, so a portion of each payment you receive will be free from federal income tax. If you use an accountant to prepare your federal income tax return, make sure the accountant is aware that part of your TSP contributions came from tax exempt combat zone pay.

The publication is up to date, having been revised in September to include all of the changes due to the Thrift Savings Plan Modernization Act. If you are eligible to participate in a TSP, you can use it to reduce the amount you pay in taxes, often with minimal impact to your net pay.

Enroll in the TSP program through your place of employment. In some cases, such as those covered by the Federal Employees Retirement System FERS , you are enrolled automatically and payroll deductions begin immediately. If you are not automatically enrolled, fill out the enrollment form available through your human resources department.

Specify how much of your income you want to contribute to your TSP account. The larger your contribution to your TSP account, the lower your current tax obligation will be. To get the most tax benefit, contribute the maximum amount allowed.

Check your TSP contributions as the end of the year approaches. You may find that you have not reached the maximum annual limit, an amount that can vary from one year to the next.

Increase your contribution percentage or change it to a flat rate so that you reach the limit by the end of the year for maximum tax benefit. Enroll in the TSP Roth account. Roth programs have specific eligibility requirements, so check with your human resources department to make sure this is an option for you before you sign up.