Saving w/ Tax Benefits. TSP vs ROTH

[LottaQuestions]

The site said no question is too simple, so here it goes. The first post of many...

How (TSP vs ROTH) should I be saving for my retirement - not getting into fund types/risk etc yet (just the vehicle)? The argument of before tax TSP vs. after tax ROTH.

29 year old FED, with a minimum of 21 years until potential retirement. Current income of $92k with a worst case income at age of retirement of $116k (for this I am thankful!). In 2012 I maxed out a Roth IRA and contributed 9% to TSP +5% gov match. Goal for 2013 is to begin maxing out retirement savings (have accepted that I can afford $17,500 but no more).

Question: Am I better off increasing my TSP contribution to 19% (apx $17,500) and stopping my ROTH contribution which I will leave in place to grow? Or should I max out the ROTH at $5,500 and contribute $12,000 to TSP (I can not presently afford to do both).

I am leaning towards stopping my ROTH and going all TSP as it carries the extra benefit of reducing my taxable income. Is the tax savings now better then the tax savings later I think is my question?

Thoughts? More information needed?

[NYBoglehead]

My suggestion would be continue to max out a Roth IRA and put whatever else you can save into the Traditional TSP for now. You want to have some Roth savings because if you will be getting a DB pension in retirement that will fill up much of the lower brackets, and any withdrawals from your TSP will be taxed at the bracket in which your pension stops, which might be higher than you are paying now.

You need to plug your own numbers and some other info (mortgage deduction, property taxes) might be lowering your taxable income to the point where it makes sense to divert some of the TSP savings into a Roth TSP account. Again, check your taxable income and do your best to estimate what your tax bracket will be in retirement.

[hoppy08520]

Following up on the earlier reply, this might apply to you if you wind up with a pension:

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

Did you know there is now a Roth TSP?

[grabiner]

You have two decisions to make: Roth versus Traditional, and TSP versus IRA if the Roth is reasonable.

What state do you live in, and do you intend to retire there? If you are paying 25% federal plus a high state tax (such as 8.5% in DC, or 7.95% in the Maryland suburbs of DC), and you might retire to a state with no income tax, then traditional accounts are likely to be better than Roth accounts because you may retire in a lower tax bracket. If you are in a state with no income tax, or in a state such as NJ which does not allow deductions for traditional TSP contributions, then you should prefer to have most of your retirement savings in Roth, which may be Roth TSP.

How much do you want to hold in asset classes that are not offered in the TSP? The I fund has no emerging markets or international small-cap, and the TSP has no real estate fund, so if you want to hold those assets, you'll need a Roth IRA for at least that part of your portfolio.

One other note: you should consider how much you can save after-tax for retirement. If you pay 30% of your income in federal and state tax, and you can afford to contribute $17,500 to a traditional TSP, you can only afford to contribute $12,250 to the Roth TSP, as that is the same amount after tax. If you contribute $17,500 to the Roth, you will have more retirement savings but less to spend now.

[LottaQuestions]

My suggestion would be continue to max out a Roth IRA and put whatever else you can save into the Traditional TSP for now. You want to have some Roth savings because if you will be getting a DB pension in retirement that will fill up much of the lower brackets, and any withdrawals from your TSP will be taxed at the bracket in which your pension stops, which might be higher than you are paying now.

You need to plug your own numbers and some other info (mortgage deduction, property taxes) might be lowering your taxable income to the point where it makes sense to divert some of the TSP savings into a Roth TSP account. Again, check your taxable income and do your best to estimate what your tax bracket will be in retirement.

Thanks for the response. Yes, I will get a DB of approximately $48k per year at earliest retirement age of 50, with an increase of 1% for each additional year.

Any suggestions on good online calculators, or formula sheets to project my retirement tax bracket? My mindset has been to save money on taxes now. But that might not be so wise?

[LottaQuestions]

Following up on the earlier reply, this might apply to you if you wind up with a pension:

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

Did you know there is now a Roth TSP?

I am aware of the ROTH TSP, but hadn't given much thought to it since I'm already maxing a ROTH IRA. My understanding is I could contribute $17,500 to the ROTH TSP vs $5,500 to my ROTH IRA? Correct? I read the attached article, which says most TSP participants saving the max should switch. My investment per year is $17,500 between the both now, so not sure I fall into the category for 'SHOULD' switch?

I apologize for being repetitive or looking like an idiot here, just trying to wrap my head around the math.

[LottaQuestions]

You have two decisions to make: Roth versus Traditional, and TSP versus IRA if the Roth is reasonable.

What state do you live in, and do you intend to retire there? If you are paying 25% federal plus a high state tax (such as 8.5% in DC, or 7.95% in the Maryland suburbs of DC), and you might retire to a state with no income tax, then traditional accounts are likely to be better than Roth accounts because you may retire in a lower tax bracket. If you are in a state with no income tax, or in a state such as NJ which does not allow deductions for traditional TSP contributions, then you should prefer to have most of your retirement savings in Roth, which may be Roth TSP.

How much do you want to hold in asset classes that are not offered in the TSP? The I fund has no emerging markets or international small-cap, and the TSP has no real estate fund, so if you want to hold those assets, you'll need a Roth IRA for at least that part of your portfolio.

One other note: you should consider how much you can save after-tax for retirement. If you pay 30% of your income in federal and state tax, and you can afford to contribute $17,500 to a traditional TSP, you can only afford to contribute $12,250 to the Roth TSP, as that is the same amount after tax. If you contribute $17,500 to the Roth, you will have more retirement savings but less to spend now.

Thanks for the input.
What state do you live in, and do you intend to retire there? I reside in the Maryland suburbs, however I soon plan on relocating to DC with plans to retire in an unknown location (out west in NM or CO in a perfect world).

How much do you want to hold in asset classes that are not offered in the TSP? I will readily admit that at this point in my life, I am not educated enough on my investments to know what classes I want to be in (future post pending on why I should be punched for being in lifecycle funds!).

[LottaQuestions]

If it helps with feedback. I can provide 2011 taxable income, exemptions and what I believe to be my tax rates, as well as projected 2012 information.

[retiredjg]

You might consider posting all your info to get a lot of questions addressed at one time. See the link at the bottom of this message for how to do that.

[NYBoglehead]

My suggestion would be continue to max out a Roth IRA and put whatever else you can save into the Traditional TSP for now. You want to have some Roth savings because if you will be getting a DB pension in retirement that will fill up much of the lower brackets, and any withdrawals from your TSP will be taxed at the bracket in which your pension stops, which might be higher than you are paying now.

You need to plug your own numbers and some other info (mortgage deduction, property taxes) might be lowering your taxable income to the point where it makes sense to divert some of the TSP savings into a Roth TSP account. Again, check your taxable income and do your best to estimate what your tax bracket will be in retirement.

Thanks for the response. Yes, I will get a DB of approximately $48k per year at earliest retirement age of 50, with an increase of 1% for each additional year.

Any suggestions on good online calculators, or formula sheets to project my retirement tax bracket? My mindset has been to save money on taxes now. But that might not be so wise?

There is no way to know what the tax rates will be in 10, 20 of 30 years from now. The best we can do is assume the same rates will exist and that the brackets will be roughly adjusted for inflation along with any deductions and exemptions. But who the heck knows? That's another reason why I like the Roth option, it provides a certain amount of certainty regarding taxation. Not being political, but I highly doubt the tax rates (especially the lower ones) will ever be lower than they are now but wouldn't discount the possibility that they would go higher. Keep in mind, during the 90s the three lowest brackets were 15/28/31. Today they are 10/15/25.

[rickmerrill]

Hah! No question is too simple you say? This question doesn't qualify! There are so many pros and cons to this and most of the predictors are so far out there is no simple answer in your case.

If you we're just starting out and expected your income to grow significantly we'd all be saying Roth. If you knew your expenses would drop your marginal tax rate in retirement then we'd say TSP. Maybe a middle of the road approach, for now, would be wise. You can adjust as the puzzle begins to get clearer with time (aka life's events). Some tax diversity is usually advantageous in retirement so for now maxing the Roth and putting the rest in the TSP seems reasonable. The best plan would be to max out both - so adding to your contributions as your salary increases will ultimately trump the Roth/deferred decision. Later, after you run out of tax advantaged space, you'll be considering some taxable contributions.

If you do decide you should have more in Roth further down the road you may have opportunities to convert some of the TSP to Roth.

[hoppy08520]

Following up on the earlier reply, this might apply to you if you wind up with a pension:

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

Did you know there is now a Roth TSP?

I am aware of the ROTH TSP, but hadn't given much thought to it since I'm already maxing a ROTH IRA. My understanding is I could contribute $17,500 to the ROTH TSP vs $5,500 to my ROTH IRA? Correct? I read the attached article, which says most TSP participants saving the max should switch. My investment per year is $17,500 between the both now, so not sure I fall into the category for 'SHOULD' switch?

I apologize for being repetitive or looking like an idiot here, just trying to wrap my head around the math.

No apologies needed! All this can be bewildering.

One important clarification: IRA and TSP contribution limits are independent of each other. It's not either/or. So, you could do $5500 in Roth IRA and $17,500 in TSP for example (beginning tax year 2013). As others have posted, the best thing you can do is try to max both of them some day.

[alisa4804]

Agree that working toward investing the maximum $5500 Roth and $17,500 to TSP annually is an important goal.

As for the Roth TSP vs the regular TSP, there are some important considerations. First, as you know, contributing to the Roth TSP instead of tax-deferred traditional TSP will increase your taxable income on your W-2, and increases your taxes due. There are also some quirks about the current Roth TSP rules that I don't like. 1) The asset allocation in both your regular TSP and Roth TSP have to be identical, the same percentages in G, F, C, S, I and Lifestyle funds - you cannot identify separate and different allocations for your traditional TSP and Roth TSP. 2) Current rules state that when you withdraw (for you, 20 years out) your TSP at retirement, they take equal amounts from the TSP and the Roth TSP, that is, you can't currently specify you want to roll over your traditional TSP and leave your Roth. This seems very awkward and TSP rules may change later, but seems an unattractive feature of the Roth TSP right now.

Good job planning and investing early in your career!

[MN Finance]

I would absolutely use the Roth, then max the TSP to the level you can. As said, it's impossible to know tax rates later, let alone next year. Because you are so young, you have to assume rates will not be lower in the future - I don't think that's a stretch. You don't need a calculator, really. Because if tax rates and your bracket are the same today as in retirement, then it's a wash either way. Lower or higher, one wins over the other. If your pension, SS and TSP are all subject to taxes in retirement, then you will want something that isn't. You can also access your Roth in an emergency if the sky should fall, and though I have no knowledge of the TSP, you probably can't access that in an emergency (not that you would ever want to, but if something crazy happens...) I would also leave room for the possibility that as a younger worker, you will eventually make more money later in life and be in higher brackets, or get married and have a spouse with high income, etc.

[retiredjg]

I would absolutely use the Roth, then max the TSP to the level you can.

Are you aware that the expenses in the TSP are lower than anything that could be bought in a Roth IRA? That could be a reason not to use Roth IRA and use Roth TSP instead.

[hoppy08520]

I would absolutely use the Roth, then max the TSP to the level you can.

Are you aware that the expenses in the TSP are lower than anything that could be bought in a Roth IRA? That could be a reason not to use Roth IRA and use Roth TSP instead.

retiredjg, you're definitely right about the TSP having the lowest expenses. I know that from first hand experience (and I know you do as well). That being said, one benefit of using a Roth IRA in lieu of the Roth TSP (assuming you have chosen to favor Roth for those contributions) is that you get access to funds outside the TSP (such as international) which is something you taught me a while ago

So, an investor has to weigh whether they want to shave a few points off their expense ratios with the TSP, or have more options in a Roth IRA. Perhaps, for more experienced/motivated investors, after you've gotten the maximum match from the government, then put as much in Roth IRA as you need to fill your international allocation (or any other exotic funds you might want in IRA, such as REIT, SCV, what have you), then go back to Roth TSP.

I'm not correcting you, and I know you're just raising a point and not making a recommendation, but I just wanted to throw that out there.

[retiredjg]

I agree with you hoppy.

My problem is the idea of filling a Roth IRA and putting the leftovers in the TSP. That may not be enough in the TSP.

In some other 401k, this could be good advice (assuming the match is met). In the TSP, it might be good advice and it might not because of the incredibly low expense ratios. I guess I was wondering if MN Finance was aware of this.

[LottaQuestions]

Hello All! Sorry for my delay in responding back.

Based on some more research, my desire to max them both out (inability to make a decision, so just do both!) and other circumstances, I've decided the following regarding this question.

I've read articles saying I can use my ROTH as an addition to my emergency fund (currently 4 months, but have very stable income/employment). I've decided to transfer $1208 from this ING savings account (earning ~1%) to max my 2012 contribution. I'm then going to move $5500.00 to the ROTH now for 2013, into a separate safer fund (similar to TSP G fund) which maxes my 2013 contribution. I've increased my TSP allotment to 19% (a little under $17.500 and will make year end adjustments) for 2013 and any left over savings availability will be used to refund my outside savings account.

My understanding of the negative is that my $5500.00 is now in safe ROTH vs. agressive ROTH. But at the end of 2013, ill move the $5500.00 to the agressive fund, then fund another $5500.00 to the safe fund etc until I can have the original $11k in the safe fund and other monies in the aggressive.

Please weigh in.

[retiredjg]

I don't see any problems with this approach.

In fact, I don't see any real problems with any of the approaches mentioned. The important thing is to be saving money. The container that holds it can be somewhat important sometimes, but not nearly as important as saving enough in the first place.

[rkhusky]

I've increased my TSP allotment to 19% (a little under $17.500 and will make year end adjustments) for 2013 and any left over savings availability will be used to refund my outside savings account.

I've found that, when maxing out the TSP, a fixed amount is easier to work with than a percentage of salary. You just have to make sure that you contribute enough to get the matching amount each paycheck. That means that if you contribute too much and reach the 17500 limit before your last paycheck, you won't get the match for those remaining paychecks (the same holds when choosing a percent of salary).

[MN Finance]

I agree with you hoppy.

My problem is the idea of filling a Roth IRA and putting the leftovers in the TSP. That may not be enough in the TSP.

In some other 401k, this could be good advice (assuming the match is met). In the TSP, it might be good advice and it might not because of the incredibly low expense ratios. I guess I was wondering if MN Finance was aware of this.

Yes, I was aware of this but frankly focusing on the taxation issues. As an engineer if I look at the huge margin of error tax rate assumptions bring into the picture, it makes nearly every other variable irrelevant. When looking at costs of the most popular 100 investment providers, we're talking about #1 and #2 (probably). Further the TSP investment choices, while enough for many people, certainly are limited. I also like the idea of controlling the money rather than it being tied to an employer - especially for a younger worker who may want/need to access the money if still employed.

[LottaQuestions]

I've increased my TSP allotment to 19% (a little under $17.500 and will make year end adjustments) for 2013 and any left over savings availability will be used to refund my outside savings account.

I've found that, when maxing out the TSP, a fixed amount is easier to work with than a percentage of salary. You just have to make sure that you contribute enough to get the matching amount each paycheck. That means that if you contribute too much and reach the 17500 limit before your last paycheck, you won't get the match for those remaining paychecks (the same holds when choosing a percent of salary).

Good point. Especially since my 2 pay period contributions thus far are under 19%, to get to the max, I'll need to do a dollar amount the remaining pay periods that is actually higher than 19%.