Traditional vs. Roth for TSP and 401(k): How to make the call

If you’ve ever stared at your enrollment screen wondering whether to check the Traditional box or the Roth box, you’re not alone. I get this question constantly from service members and professionals in their first or second career. The short answer is that the choice comes down to tax timing and a few real-life variables most people overlook.

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First, what each option actually does

Traditional (TSP or 401(k))

• Contributions go in pre-tax.

• You reduce taxable income today.

• Growth is tax-deferred.

• Withdrawals in retirement are taxed as ordinary income.

• Required Minimum Distributions apply later in life under current law.

Roth (TSP or 401(k))

• Contributions go in after-tax.

• No deduction today.

• Growth is tax-free.

• Qualified withdrawals are tax-free.

• Check plan rules on RMDs for Roth employer plans; Roth IRAs do not have RMDs.

The equal-bracket math that trips people up

If your tax bracket is the same when you contribute and when you withdraw, the math is a wash.

• Put $10,000 in a Roth, pay 22% tax now, invest $7,800, let it grow for 40 years to about $418,000, and you keep it tax-free.

• Put $10,000 in Traditional, invest the full $10,000, let it grow to about $537,000, then pay 22% on withdrawals. After tax, you’re near $418,000 again.

So, the issue is whether you will be in a higher tax bracket when you withdraw then when you contribute.  BUT keep in mind all withdraws count as income so make sure you consider withdraws when deciding on the withdraw tax bracket. 

When Roth tends to win

• Early career with higher income ahead

• You’re maxing contributions and want to maximize after-tax space (Remember $23,500 in a Roth is more valuable than $23,500 in a Traditional)

• You want tax-free flexibility later

• You expect higher future tax rates

• You want to reduce exposure to RMDs

When Traditional can make sense

• One-time big bonus pushes you up a bracket

• You expect to retire to a much lower-tax state

• You need the deduction to free up cash flow this year

Variables most people forget

• Spending drives retirement tax rate

• RMD risk from large Traditional balances

• Heirs’ tax brackets under the 10-year rule

• State taxes now vs. later

A simple case study from the planning software

We modeled a 22-year-old O-1 who auto-enrolled at 15% Traditional during service (+5% government contributions), then 13% Traditional with a 4% employer match in a second career. Switching those same percentages to Roth lifted plan success by about 31 points and raised the median ending portfolio from a bit over $200,000 to a bit over $1,000,000. With Social Security at 70, the plan approached 95% success rate with a median end of plan amount near $1.5 million.

A quick decision checklist

• Will your retirement tax bracket be higher or lower than today?

• Will you likely max your contributions?

• Do you want fewer RMD headaches and more flexibility for heirs?

• Any one-time income spikes this year?

• What’s your state tax picture now vs. retirement?

If you want help pressure-testing your situation, schedule a quick call and I’d be happy to help!

Disclaimer: Education only. Not financial, tax, or legal advice. All investments involve risk, including loss of principal. Past performance is not a guarantee of future results.