TSP Roth

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TSP Roth

Postby JSeiden5 » Mon Feb 20, 2012 8:56 pm

This is my first post on the board so I'd like to start by saying hello.

I have a question regarding the new TSP Roth option and adjusted gross income (AGI). I am currently paying back school loans under the income based repayment (IBR) plan option. My monthly repayment amount is directly figured off of my AGI. Currently I am having 5% (max matching) of my income to my TSP. In addition, for the last few years I have been maxing out my Roth IRA.

Here is my question: If I switch to the Roth TSP option, will my AGI still be reduced by the amount I am distributing to my TSP? Or, since this amount will now be taxed will this be figured into (added) to my AGI.

Pending an answer to this question that the Roth TSP option still reduces my AGI, would it now be more beneficial to invest the money that I have been investing in my Roth IRA into my Roth TSP option? If the previous assumption is wrong, and the Roth TSP option now increases my AGI, what are my best options for future investments?

With my income and AGI increasing, I foresee my monthly school loan payments becoming too high. I am thinking that I may need to start deferring payment for 6 months, and making payments the other 6. I don't believe there are too many other options for me to reduce my AGI to a level where I can reasonably meet monthly school loan payments.

If I missed any details, or anyone needs more clarity please let me know. I look forward to any replies.

Thanks.
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Re: TSP Roth

Postby tfb » Mon Feb 20, 2012 10:59 pm

JSeiden5 wrote:Here is my question: If I switch to the Roth TSP option, will my AGI still be reduced by the amount I am distributing to my TSP?

No. Your AGI will be higher.
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Re: TSP Roth

Postby stan1 » Mon Feb 20, 2012 11:05 pm

I don't know much about student loans, but your contributions to a Traditional TSP do reduce your AGI and your contributions to a Roth TSP will not reduce your AGI.

What is the interest rate on your student loans? If the rate is high your best option might be to pay off the loans instead of investing in the Roth IRA or the TSP beyond the match.
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Re: TSP Roth

Postby JSeiden5 » Mon Feb 20, 2012 11:55 pm

stan1 wrote:I don't know much about student loans, but your contributions to a Traditional TSP do reduce your AGI and your contributions to a Roth TSP will not reduce your AGI.

What is the interest rate on your student loans? If the rate is high your best option might be to pay off the loans instead of investing in the Roth IRA or the TSP beyond the match.


Right now I have about 75k (undergrad and MBA) at 5.75%. However, I have not made an effort to pay this loan down because under Federal service I qualify for loan forgiveness after 120 qualifying payments. A payment under the income based repayment (IBR) plan counts as a qualifying payment. The payment is between 10% and 15% of my AGI. I have already made 28 payments, none of which were over $400. The calculations are very tricky to determine if this is a good option for me. What I do know is now my payments are very reasonable. And, have no need to worry about interest accruing.
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Re: TSP Roth

Postby Default User BR » Tue Feb 21, 2012 2:23 pm

What is your marginal tax bracket? Any state tax? It might not be best to use Roth TSP even if without the AGI situation.



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Re: TSP Roth

Postby JSeiden5 » Tue Feb 21, 2012 3:27 pm

Default User BR wrote:What is your marginal tax bracket? Any state tax? It might not be best to use Roth TSP even if without the AGI situation.


Federal marginal rate is 25%, state (Maryland) is 4.75%
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Re: TSP Roth

Postby Default User BR » Tue Feb 21, 2012 7:24 pm

JSeiden5 wrote:
Default User BR wrote:What is your marginal tax bracket? Any state tax? It might not be best to use Roth TSP even if without the AGI situation.

Federal marginal rate is 25%, state (Maryland) is 4.75%

I wouldn't recommend Roth in that situation.



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Re: TSP Roth

Postby grabiner » Tue Feb 21, 2012 7:56 pm

JSeiden5 wrote:
Default User BR wrote:What is your marginal tax bracket? Any state tax? It might not be best to use Roth TSP even if without the AGI situation.


Federal marginal rate is 25%, state (Maryland) is 4.75%


Your state tax rate in Maryland is higher, probably 7.95%, because this includes the county tax. That makes the traditional TSP even more attractive.

Regardless, given the income-based repayment program, you should definitely use the TSP, and contribute the max to the TSP before opening a Roth IRA. If your payments are based on 15% of your income, and the loans will be forgiven automatically regardless of how much you were required to pay, then you have an additional 15% savings in addition to the tax advantage.
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Re: TSP Roth

Postby JSeiden5 » Wed Feb 22, 2012 11:21 am

Default User BR wrote:Regardless, given the income-based repayment program, you should definitely use the TSP, and contribute the max to the TSP before opening a Roth IRA.


Thanks, David. In the past I have focused so much on maxing out my Roth IRA. Like you said, I should start focusing on maxing out my TSP first.

Another quick question regarding my AGI. It is probably a very simple answer. However, I cannot find it online.

If I increase my Federal tax withholding exemption (0 to 1), decreasing the amount of Federal taxes withheld out of my paycheck, will it affect my AGI?
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Re: TSP Roth

Postby Bruce » Wed Feb 22, 2012 12:25 pm

JSeiden5 wrote:f I increase my Federal tax withholding exemption (0 to 1), decreasing the amount of Federal taxes withheld out of my paycheck, will it affect my AGI?


No

The amount withheld for income tax does not reduce your AGI.
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