Which Is Better — a Traditional or Roth Retirement Plan?

A reader named Carole once asked me a very straightforward question:

Should I convert my TSP traditional to a Roth TSP?

That question echoes a more general query that is practically as old as the Roth retirement plan: When it comes to retirement plans, which is better — Roth or regular?

If you’re confused about “TSP,” that stands for Thrift Savings Plan, a federal government plan that functions much like a private company 401(k) or the nonprofit version, the 403(b). For the purposes of this discussion, they’re all interchangeable. But if you’re curious about TSPs, you can read about them at the Thrift Savings Plan website.

Now, let’s explore the differences between Roth and regular retirement plans.

The difference between regular and Roth

Both Roth and regular retirement plans provide tax deferral on investment earnings. But when it comes to contributions and withdrawals, there are key differences.

  • Traditional retirement plan. You do not have to pay taxes on the money you put into the plan during the year you make the contribution. However, you pay taxes on withdrawals as ordinary income when you take the money out in retirement.
  • Roth retirement plan. You don’t get a deduction during the year you make the contribution. However, when you take the money out, it comes out tax-free.

So, when you’re asking whether a traditional or Roth is better, what you’re really asking is whether it’s better to get a deduction now or get tax-free income after retirement.

Which is better?

While many financial writers sing the praises of the Roth and recommend it almost universally, it isn’t really that cut and dried.

That’s because the answer ultimately depends on factors you can’t know. For example, if you’re in a high tax bracket now but expect to be in a zero tax bracket when you retire, you’d be better off avoiding the Roth and deducting your retirement contributions now with a regular plan.

If you’re going to be in the same tax bracket when you retire — or a higher one — it would be best to use a Roth and pay no taxes when you take the money out.

Unfortunately, there’s no way to know what the tax tables will look like when you retire, especially if it’s far in the future. And as one of my tax professors was fond of saying, “In the long term, we’re all dead.”

In other words, some might argue that today’s bird in hand — a deduction on contributions — is better than tax-free withdrawals at some future date. After all, while it’s unlikely, Congress theoretically could change the rules and start taxing Roth IRA withdrawals. Then, of course, there’s also the possibility you may not live to see your golden years.

There are calculators online that are supposed to help you decide. But all require you to know the unknowable: how much you’re going to earn on your investments, and your tax bracket after retirement.

After fooling around with a few calculators, you’ll probably decide that a Roth is the way to go, especially if you believe taxes will be higher in your golden years. But here’s the answer I most often give: Since you’re not required to fund only one type or the other, why not have both? That way, you can get some deductions now, and you’ll have a tax-free source of retirement income, too.

Doing a Roth rollover

Many employers allow plan participants to convert existing 401(k) balances from regular to Roth. The basics are simple. You simply designate all or part of your existing 401(k) to a Roth and pay the income taxes on the amount you convert.

As for TSPs, according to the Federal Retirement Thrift Investment Board, you can’t convert existing TSP balances to Roth. You can, however, designate future contributions as Roth, either in whole or in part.

Got a question you’d like answered?

I answer reader questions three times a week in my “Ask Stacy” column. If you have a question of your own, ask it by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!

The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Countries Where You Can Retire on $2,000 a Month or Less
5 Countries Where You Can Retire on $2,000 a Month or Less

These tips on retiring overseas come from someone who’s been helping American expats for decades.

The Annuity Everyone Needs — and Anybody Can Get
The Annuity Everyone Needs — and Anybody Can Get

This simple strategy can put more money in your pocket during retirement.

16 Products You Absolutely Do Not Need
16 Products You Absolutely Do Not Need

You can safely leave these products on the store shelf.

10 Expenses You Should Not Put on a Credit Card
10 Expenses You Should Not Put on a Credit Card

Sometimes it’s simply safer to keep the plastic tucked away.

21 Thrift Store Gems You Can Cash In On
21 Thrift Store Gems You Can Cash In On

Here’s what to look for at that overstuffed thrift store — and how you can make money from it.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

36 Things That Will Be Obsolete Soon
36 Things That Will Be Obsolete Soon

The writing is on the wall for dozens of things we have grown up with.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

8 Federal Income Tax Breaks for Homeowners
8 Federal Income Tax Breaks for Homeowners

Some of these deductions and credits are available to a wide swath of homeowners.

10 Deep Discounts Available on Amazon This Friday
10 Deep Discounts Available on Amazon This Friday

These items are steeply discounted — but the deals won’t last long.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

10 Types of Retirement Income That Are Not Taxable
10 Types of Retirement Income That Are Not Taxable

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.