TSP or TSP Roth Help

[Anonymous]

I've searched the forums, but couldn't find anything to match my situation to see if I should be putting money to both TSP and TSP Roth or one or the other.

I'm 31, been with the fed govt almost 8 years, am a GS-12, step 4. Have been contributing 7% to the TSP 2040 plan as my eligible retirement date is 2039. Does this make sense? Or should I put 5% in regular to get the match and then 2% in the Roth? Seems like much is unknown as to what tax bracket I'd be in when withdrawing??

Thank you and sorry I'm so oblivious about these things. Trying to learn!!

[Anonymous]

I would just put as much as you can in the traditional TSP because chances are that you will be in a lower tax bracket in retirement. See if you can up your contributions to 10% (note that putting 2% in the Roth will take more out of your paycheck than putting 2% in the regular TSP).

Go look at tax brackets and assume you get your pension, and you get SS, and you annuitize your TSP (they give you that estimate, or you can assume you withdraw 4% of final balance each year). I think it's highly likely that will suggest you will be in a lower tax bracket (and even *if* taxes go up generally they are unlikely to go up enough to be more than your current tax bracket).

Now if you were contributing the max to TSP and wanted to save more, you might want to put money in the Roth instead of the traditional, but I think it would still make more sense to use a Roth IRA for that instead.

[Anonymous]

It depends on your plans. I think conventional wisdom says that if you work for the federal government for 30 years, then you should try to maximize your Roth investments. Why? Because the pension and Social Security bump you to a higher tax bracket. I'm a fed. I invest 10% into regular TSP and max out my Vanguard Roth IRA. But I will probably only work as fed 5-10 years total.

[Anonymous]

20:06 PP here. I forgot this:
http://thefinancebuff.com/most-tsp-participiants-should-switch-to-the-roth-tsp.html

[Anonymous]

Anonymous wrote:20:06 PP here. I forgot this:
http://thefinancebuff.com/most-tsp-participiants-should-switch-to-the-roth-tsp.html

That advice only applies to people maxing out their TSP, and (IMO) even for them it's iffy.


OP-- mathematically the Roth and regular TSP work out the same if your tax bracket stay the same and if you invest the same total amount. If right now you are putting $8000 (pre-tax) into your TSP, that is the same as putting $6000 into the Roth and paying tax of $2000 (assuming that you are in a 25% total marginal tax bracket). In one case you pay the tax now, and have a smaller amount to grow but you get to keep it all, in the other case you essentially have the $2000 in your account but you will need it (and its earnings) to pay tax when you retire and start withdrawals.

The two differences are: 1) if tax rates change for you in the future vs now (obviously you want to pay the taxes whenever they are lower) and 2) the Roth effectively lets you earmark more $ for retirement because you get to save $17.5k and pay tax out of other funds, whereas for your TSP you get to save $17.5k and you'll have to pay taxes out of that money eventually.

The second difference doesn't matter to you if you are not maxing out your contributions, so the question is whether you think you will be in a higher tax bracket in retirement (if it's the same tax bracket it doesn't matter what you choose, if you end up in a lower tax bracket you want to stay in traditional TSP).

[Anonymous]

Stupid question; but why wouldn't I (not OP, but fed in a similar situation) be in a lower tax bracket when I retire?

Seems like once my income goes away, even with the new sources (SS, etc), my tax bracket will go down?

[Anonymous]

Roth makes great sense to young workers with good earning potential (start retirement savings when your tax rate is really low) or for high earners who are saving as much as they can in tax advantaged accounts (because you can invest "more" in a Roth, as the PP explained, since the contribution max is the same, but it is after-tax money, plus their marginal tax rate will be the same or higher if they are saving so much).

For everyone in the middle, Roth is not that big an advantage, it is just a gamble between paying tax now or later. If you are not to the point of maxing your retirement account I would use the traditional TSP, maybe open a Roth IRA if you have some extra at the end of the year, or contribute enough to the traditional TSP to put your taxable income for the year down around the threshold for the 15% marginal rate and then put any extra into a Roth, since that money would go in with tax paid at 15% rather than 25%.

If you retired now, your tax bracket would likely be lower than while you were working, but when you won't return for 20-30 years, you don't know how the tax rates will change. Eventually the government will have to pay off the debt, that money has to come from somewhere, many expect tax rates to rise eventually. Many heavy savers plan to be able to draw enough from their retirement to match or nearly match their working income.

[Anonymous]

OP here. Thanks all! Great info here. Sounds like I should worry abut upping my traditional TSP before anything else.

[Anonymous]

I would rethink any of the target year funds IMO.

I have no affiliation with it other than as a paying subscriber but I've used TSP Pilot for more than 10 yrs. and it has saved me hundreds of thousands of dollars of losses in my TSP account with accurate advice around the '08 crash to reallocate, avoiding huge losses. It's also done well on the upside.

I don't really like or trust any of the target date funds in any portfolio/company for various reasons. For a fairly small annual fee you can get what IMO/IME has been pretty good advice (which you don't have to take but at least you get the benefit of it) to help you manage your TSP yourself.

Coincidentally it has been close to the advice/allocations of our outside investment manager, who also has a strong track record for -- most importantly --- missing the big down dips, and secondarily, for performing well in up markets. Missing the downslides is what will save you in the long run IMO.

It's a big reason why I was able to build a very substantial TSP balance (max it out from Day 1) that took only a very slight hit in the big downturn and has since done very well on the upside.

Maximize your TSP contributions. It's critical for your long term financial viability (it's a good portion of what allowed me to retire slightly early).

[Anonymous]

Anonymous wrote:I would just put as much as you can in the traditional TSP because chances are that you will be in a lower tax bracket in retirement. See if you can up your contributions to 10% (note that putting 2% in the Roth will take more out of your paycheck than putting 2% in the regular TSP).

Go look at tax brackets and assume you get your pension, and you get SS, and you annuitize your TSP (they give you that estimate, or you can assume you withdraw 4% of final balance each year). I think it's highly likely that will suggest you will be in a lower tax bracket (and even *if* taxes go up generally they are unlikely to go up enough to be more than your current tax bracket).

Now if you were contributing the max to TSP and wanted to save more, you might want to put money in the Roth instead of the traditional, but I think it would still make more sense to use a Roth IRA for that instead.

+1

At your age, PP, you should put the annual max in the regular TSP ($17,500 per year right now). You will really wish you did in about ten years or so. Find a way to do it. Plus you get the guaranteed tax savings. That's like a 25% return right there!

[Anonymous]

Anonymous wrote:OP here. Thanks all! Great info here. Sounds like I should worry abut upping my traditional TSP before anything else.

exactly this. how much you contribute will be far more important than the secondary decision of whether you do roth or traditional.

[Anonymous]

OP here. I'm working on getting there! Started as a GS 6 putting in 1% and could barely pay my rent so I've come a long way! Want to up it soon, but baby starting daycare next month and need to see how this affects the budget. DH's work is commission based so I sometimes get scared about tying up money, but we do have an emergency fund for that.

[Anonymous]

I'm mid career but plan to put part of mine in a Roth since there is no required minimum distribution (RMD) once you hit 70 1/2 like there is with the traditional TSP (and all other traditional IRA/401K plans). So you can keep growing your tax free earnings forever. If I were early career, I'd do mostly Roth.

[Anonymous]

PP here. Also, not a fan of the Lifecycle funds as I think they're too conservative as you get closer to the retirement date. People tend to complain that TSP isn't diversified enough, but it's more diversified than it used to be and while it doesn't have a REIT, it has large cap, small cap and international so that covers quite a bit.