FERS employees generally have three primary ways to build for retirement. A FERS pension, Social Security, and the Thrift Savings Plan (TSP). The last of these three — the TSP — is a government-sponsored 401(k) program that allows federal workers the opportunity to accumulate retirement savings. Though the TSP does have a certain amount of flexibility there are annual TSP contribution limits. Once these limits are met an employee can no longer contribute to TSP for that year, however, that does not mean an employee can no longer accumulate retirement savings. IRAs or Individual Retirement Arrangements allow federal employees to accumulate retirement savings in much the same way as the TSP, with a few significant differences.
A traditional IRA, like the traditional TSP, is not in itself an investment but is merely a “tax-wrapper” in which investments are held. This “tax-wrapper” means that IRA and TSP funds receive special tax treatment—the funds are tax-deferred. With tax-deferred money, assuming several key requirements are met, you pay no tax when you contribute to the IRA but will pay tax when you withdraw the funds. In certain situations, this can be very beneficial, especially if you will be in a lower tax bracket in retirement. However, federal employees with a robust pension are not guaranteed to move to a lower tax bracket in retirement.
A Roth IRA is simply another kind of “tax-wrapper”. Roth funds are often called “tax-free” however this phrase can be a bit misleading. Tax is paid when you contribute to a Roth IRA, however, the money grows tax-free and will be tax-free when you begin to withdraw money in retirement, assuming you meet other requirements. Roth money can be accessed tax-free if you have owned the account for at least five years and are age 59 ½. For those who will not be in a lower tax bracket in retirement, as can be the case for federal employees, Roth IRAs may be a beneficial option.
One key difference between traditional IRAs and Roth IRAs is required minimum distributions (RMDs). Traditional IRAs require you to begin taking withdrawals or required minimum distributions from your IRA at age 72 (see the SECURE Act blog for more on RMD rules). When you begin taking RMDs you will also be required to pay taxes on these distributions. Roth IRAs vary from traditional IRAs in this area. Roth IRAs are not subject to RMDs. Not being forced to withdraw money when you don’t need it is a significant aspect of Roth IRAs and one which further distinguishes the Roth IRA from federal employees traditional and Roth TSP.
CAN I CONTRIBUTE TO AN IRA?
When it comes to IRAs there are both contributions and income limits. The IRA contribution limit for 2020 is an annual amount of $6,000 if younger than 50. Those age 50 or older can contribute $7,000 annually. Note that this is the contribution limit for total IRA contributions. In other words, if younger than 50 you can contribute at most $6,000 to IRAs, whether Roth, traditional or some combination of the two. Note that the IRA contribution limits are different—and significantly lower than the TSP contribution limits. For more on TSP contribution limits see our blog.
The chart below lists both the 2020 IRA and TSP contribution limits.
|2020 Contribution Limits|
|IRA||Under 50: $6,000|
|50 and older: $7,000|
|TSP||Under 50: $19,500|
|50 and older: $26,000|
Roth IRAs also have income limits restricting those who can contribute—if you earn more than the limit, you cannot make contributions. Roth IRA contributions are subject to contribution phase-out for higher-earning individuals. According to the rules for 2020, single people earning more than $139,000 and married couples filing jointly who earn more than $206,000 are not able to contribute to a Roth IRA at all.