Not maxing TSP (401k) but putting some in ROTH IRA?

[ks1773]

Hello,

I have a quick question regarding TSP (401k gov) + Roth IRA.

Should I contribute about 12500 to my Trad TSP and max ROTH IRA at 5000? or should I put the full 17500 in my TSP?

contributing 12500 would ensure that I am in the lower tax bracket (25%) and no matter how much I contribute I would not be in the 15% bracket. (I make around 80-95k/year)

I am unable to contribute more than 17500/year to my future retirement plan since I am saving for my down payment for my first house.

I am leaning toward doing 12500 on TSP and then 5000 on ROTH because I feel like the tax would be way higher when I retire in 2052. However, I would love to hear some inputs.

[tainted-meat]

You can make a case for doing either since you will have a nice pension that will cover the lower tax brackets in retirement. Do you have enough money to max the TSP @ 17500 and the Roth @ 5,500?

If I had to choose between the two, I would max the regular TSP and retire sooner if you are concerned with having too much in pre-tax savings.

[BL]

The TSP is now also available in Roth form, at least in the military. This would be the lowest-cost alternative, unless you really want Vanguard's Total International in a Roth.

[bdpb]

Should I contribute about 12500 to my TSP and max ROTH IRA at 5000? or should I put the full 17500 in my TSP?

These two are not equivalent. You would be saving more in the first case.

[ks1773]

Should I contribute about 12500 to my TSP and max ROTH IRA at 5000? or should I put the full 17500 in my TSP?

These two are not equivalent. You would be saving more in the first case.

by not equivalent, you mean because ROTH IRA is post-tax right? Yea I do realize that.

The TSP is now also available in Roth form, at least in the military. This would be the lowest-cost alternative, unless you really want Vanguard's Total International in a Roth.

I have decided to go with Vanguard ROTH IRA because I've heard that TSP ROTH is not very good at this time.

You can make a case for doing either since you will have a nice pension that will cover the lower tax brackets in retirement. Do you have enough money to max the TSP @ 17500 and the Roth @ 5,500?

If I had to choose between the two, I would max the regular TSP and retire sooner if you are concerned with having too much in pre-tax savings.

Unfortunately, I cannot max TSP or Roth at this time :/ I will as soon as my income stabilizes more. Thanks for the suggestion!

[stan1]

If it was me, I would put $5000/yr into the Roth IRA so that you have access to asset classes that are not available in TSP (TIPS, Value tilt, REIT, Emerging Markets, International Small). If you are comfortable with S&P 500 (C), Completion Index (S), and Developed Markets (I) plus G and F Funds then stick with the TSP.

Yes the TSP has very low expense ratios, but the difference between TSP and Vanguard would be at most $20 year for every $10K invested at Vanguard and my choice would be to pay that for broader diversification. Your evaluation of the choices may give a different result that works better for your goals and preferences.

Traditional TSP vs Roth TSP is a tough call. I've made the choice to go with Traditional since I'm in the 28% federal plus 9.3% state tax bracket. The sure thing of $17,000 in current year tax free income and $17K*37.3%=$6341 in tax savings to invest elsewhere comes out ahead for me over speculation about future tax rates, rates of return, pension benefits, etc. that gets tied up in a decision to use the Roth TSP.

[stan1]

I have decided to go with Vanguard ROTH IRA because I've heard that TSP ROTH is not very good at this time.

Can you elaborate? Roth TSP is the same investment choices as Traditional TSP.

Are you hearing that the Roth TSP isn't good from someone who doesn't like index funds?

[NYBoglehead]

Roth TSP is excellent. It is the exact same funds as the regular TSP. Whoever told you that is seriously misguided. If you can save 17,500 for the year I'd go $12,500 in regular TSP to get you down to the 25% bracket and then put $5k into the Roth TSP. You simply cannot beat the 2.5 bps ER.

[sls239]

Based on your cited 2052 retirement year, I'm going to assume you are pretty young.

Your marginal tax rate could very well go down if you bought a house got married and had kids - especially if the wife stayed home with the kids. Unless you've ruled that out as a lifestyle choice, my inclination would be to favor the pre-tax contributions. But that is really just fortune telling. The important part is to save money and lots of it.

[ks1773]

If it was me, I would put $5000/yr into the Roth IRA so that you have access to asset classes that are not available in TSP (TIPS, Value tilt, REIT, Emerging Markets, International Small). If you are comfortable with S&P 500 (C), Completion Index (S), and Developed Markets (I) plus G and F Funds then stick with the TSP.

Yes the TSP has very low expense ratios, but the difference between TSP and Vanguard would be at most $20 year for every $10K invested at Vanguard and my choice would be to pay that for broader diversification. Your evaluation of the choices may give a different result that works better for your goals and preferences.

Traditional TSP vs Roth TSP is a tough call. I've made the choice to go with Traditional since I'm in the 28% federal plus 9.3% state tax bracket. The sure thing of $17,000 in current year tax free income and $17K*37.3%=$6341 in tax savings to invest elsewhere comes out ahead for me over speculation about future tax rates, rates of return, pension benefits, etc. that gets tied up in a decision to use the Roth TSP.

Thank you for the input!

Roth TSP is excellent. It is the exact same funds as the regular TSP. Whoever told you that is seriously misguided. If you can save 17,500 for the year I'd go $12,500 in regular TSP to get you down to the 25% bracket and then put $5k into the Roth TSP. You simply cannot beat the 2.5 bps ER.

I have decided to go with Vanguard ROTH IRA because I've heard that TSP ROTH is not very good at this time.

Can you elaborate? Roth TSP is the same investment choices as Traditional TSP.

Are you hearing that the Roth TSP isn't good from someone who doesn't like index funds?

I actually heard it from another forum regarding TSP (not sure if I am allowed to list the forum name). That the contribution allocation for both TSP trad and TSP roth moves together when you change one of them. Also, eventually I want to max my TSP trad and the max contribution is 17500 for both TSP trad and TSP roth combined. (so sooner/later I would have to look for an alternative Roth).

Based on your cited 2052 retirement year, I'm going to assume you are pretty young.

Your marginal tax rate could very well go down if you bought a house got married and had kids - especially if the wife stayed home with the kids. Unless you've ruled that out as a lifestyle choice, my inclination would be to favor the pre-tax contributions. But that is really just fortune telling. The important part is to save money and lots of it.

I am 23 and I don't know if my husband wants to stay home with the kids... I sure dont want to be a house-wife tho.

[stan1]

I actually heard it from another forum regarding TSP (not sure if I am allowed to list the forum name). That the contribution allocation for both TSP trad and TSP roth moves together when you change one of them. Also, eventually I want to max my TSP trad and the max contribution is 17500 for both TSP trad and TSP roth combined. (so sooner/later I would have to look for an alternative Roth).

Yeah, that's true. The TSP forces you to have the same asset allocation for both the Traditional and Roth components.

Let's say you have $100K at the TSP split out into 90K in a Traditional TSP subaccount and 10K in a Roth TSP.
If you do an interfund exchange to 40% C, 10% S, and 50% G you would get:
Traditional: $36K C, $9K S, and $45K G
Roth: $4K C, $1K S, and $5K G

Less than optimal, but should not be a showstopper if you are happy with the TSP's investment options (or are using a lifecycle fund).

[baw703916]

I actually heard it from another forum regarding TSP (not sure if I am allowed to list the forum name). That the contribution allocation for both TSP trad and TSP roth moves together when you change one of them. Also, eventually I want to max my TSP trad and the max contribution is 17500 for both TSP trad and TSP roth combined. (so sooner/later I would have to look for an alternative Roth).

Yeah, that's true. The TSP forces you to have the same asset allocation for both the Traditional and Roth components.

Let's say you have $100K at the TSP split out into 90K in a Traditional TSP subaccount and 10K in a Roth TSP.
If you do an interfund exchange to 40% C, 10% S, and 50% G you would get:
Traditional: $36K C, $9K S, and $45K G
Roth: $4K C, $1K S, and $5K G

Less than optimal, but should not be a showstopper if you are happy with the TSP's investment options (or are using a lifecycle fund).

There is actually a way around that. Remember that allocation of new contributions isn't the same as rebalancing existing funds. So if you just make your contributions regular for part of the year, and set some allocation, then make them Roth the rest of the year and use a different allocation, you can make the two different--at least unless you need to rebalance.

[stan1]

I actually heard it from another forum regarding TSP (not sure if I am allowed to list the forum name). That the contribution allocation for both TSP trad and TSP roth moves together when you change one of them. Also, eventually I want to max my TSP trad and the max contribution is 17500 for both TSP trad and TSP roth combined. (so sooner/later I would have to look for an alternative Roth).

Yeah, that's true. The TSP forces you to have the same asset allocation for both the Traditional and Roth components.


There is actually a way around that. Remember that allocation of new contributions isn't the same as rebalancing existing funds. So if you just make your contributions regular for part of the year, and set some allocation, then make them Roth the rest of the year and use a different allocation, you can make the two different--at least unless you need to rebalance.

Yeah, it might be necessary to rebalance more than once in a lifetime

[retiredjg]

I actually heard it from another forum regarding TSP (not sure if I am allowed to list the forum name). That the contribution allocation for both TSP trad and TSP roth moves together when you change one of them.

I think this might be pretty standard. I don't recall hearing about 401ks that let you invest the Roth portion and the traditional portion differently.

Is it possible that someone is just bellyaching because the TSP isn't what he/she wants it to be? There are some of those out there and they tend to be pretty vocal.

At this point, I don't think it will matter a lot what you do so I'd just go with personal preference. By the end of your careers, it would be good to have both traditional investments and Roth investments, but it does not all have to happen right now.

You might find this article helpful. It supports using Roth TSP over traditional TSP because of the pension that will fill lower tax brackets in retirement. Without a pension, the "better" choice would usually be traditional instead of Roth.

http://thefinancebuff.com/most-tsp-part ... h-tsp.html

[Default User BR]

There's nothing wrong with going Roth IRA if that fits your needs better. The TSP does what it does very well, but that's fairly limited. It's like a guy I knew who only fixed carburetors. You couldn't get anything else fixed there, but if you needed carb work he was cheap and skilled.

A Roth IRA would allow diversifying your portfolio, say by adding REIT or value funds, or mixing your bonds in a different fashion than Barclay's Aggregate. And it would allow holding different allocations in traditional and Roth if that's a factor.


Brian

[larmewar]

Perhaps the post concerning Roth TSP not being very good referred to lack of flexibility in withdrawals. Verify in TSP literature, but I understand making an early withdrawal of contributions from Roth TSP carries 10% tax penalty, withdrawals from TSP are made proportionately between traditional and Roth contributions and Roth TSP is subject to RMD.

So thanks for your post, as it is prompting me to consider spousal Roth conversions/contributions instead of splitting TSP contributions between traditional and Roth contributions.

Lar