Portfolio Review and ROTH TSP

[steelerfan]

Hello everyone. I was reviewing my portfolio and trying to plan ahead for the coming ROTH TSP option. So here are my particulars. Feel free to ask for more information if you think it is needed:

Emergency fund: fully funded

Debt free except for mortgage. Will have it paid off before I retire at 65.

Tax filing status: Married filling jointly

Tax Rate: 25% Federal and 6% Georgia

I am 47 years old.

Desired AA is ~ 70/30 with ~ 25% of stocks international

Current Porfolio:

His ROTH @ V'guard:
23% TR2020

Her ROTH @ V'guard
17% TR2020

His 401K:
60% TSP (L2030)

Total portfolio worth ~ 6 figures.

I am retired US Army (with pension) and I currently work for Federal Gov't as GS-9 under FERS retirement which will give me another pension. I am investing ~15% of household gross income and saving an additional 10%.

My questions are:

Should I continue in the ROTH IRAs?
When the ROTH TSP is offered should I switch to it?
Is there anything you would recommend I change?

[Pennstateclj1]

If you want a full review, you need to tell us what is in each of your accounts- follow this format please
http://www.bogleheads.org/forum/viewtopic.php?t=6212

ROTH TSP will depend a lot on your current and future tax rates, your pensions will factor into those. Are you law enforcement or eligible for the SRS (special retirement supplement)? Please edit you original post with all the other info and we'll try to help you out.

[steelerfan]

If you want a full review, you need to tell us what is in each of your accounts- follow this format please
http://www.bogleheads.org/forum/viewtopic.php?t=6212

ROTH TSP will depend a lot on your current and future tax rates, your pensions will factor into those. Are you law enforcement or eligible for the SRS (special retirement supplement)? Please edit you original post with all the other info and we'll try to help you out.

Thanks Pennstate. I have edited my original post. I am not law enforcement or eligible for SRS.

[stan1]

I've thought about this quite a bit, and I think its coming down to how you plan to use the money after you retire -- and whether you want to prepay taxes now while you have higher income.

If your military pension is not taxable you might want to consider keeping the Traditional TSP so you get the tax deduction now and can withdraw in retirement when you might have a lower tax rate. If your military pension is taxable you might never be below the 25% tax rate. If losing the deductibility of the Traditional TSP contributions would cause you to rise into the 28% tax bracket you might want to keep the Traditional TSP.

If you expect to live off the pensions and leave most of the TSP to your children, you might consider the Roth as there is no RMD when it is inherited.

Otherwise it really is a tough call and there really is no way to tell which will be better in the long run. If you like the idea of prepaying the tax so you have more certainty in retirement, that's a plus for the Roth. If you want the tax deduction now so you can maximize your savings that's a plus for the Traditional. Clear?

[retiredjg]

Should I continue in the ROTH IRAs?

As opposed to what? Saving more in the TSP? Saving more in a taxable account? Not saving as much?

If you are going to save money, Roth IRA is one of the best places to do it. If you are not maxing out the TSP, that could be as good an idea as Roth IRA.

When the ROTH TSP is offered should I switch to it?

Hard to say. With a military pension and a GS-9 (or higher) pension, it is unlikely that you will be in a lower tax bracket than now. I don't see a clear benefit from choosing one over the other. You can pay 25% now to get money into Roth TSP or you can pay 25% on the money coming out of the traditional TSP. In your situation, it will probably be the same end result no matter which choice you make.

Here is one person's opinion that is different from mine. http://thefinancebuff.com/most-tsp-part ... h-tsp.html

Is there anything you would recommend I change?

If you wanted to, you could switch to using individual funds rather than target type funds. However, the way you have things set up right now is just fine.

[grabiner]

Where do you expect to retire? This may affect your state income taxes. The GA tax is almost flat, and your FERS and military pensions will presumably use up the retirement income exclusion for GA, so if you retire in GA, you will probably retire in the same 6% tax bracket. If you retire to a no-tax state and retire in the same federal tax bracket, then the traditional TSP is better than the Roth because you won't pay taxes on traditional TSP withdrawals. Conversely, if you retire to a high-tax state, the Roth TSP is better.

[Sean1215]

I think grabiner's question about retirement location will be the main one. If you are going to a lower or no income tax state, then paying the extra tax now is a disadvantage. (Some might be overcome if you are maxing out your tax sheltered space. http://thefinancebuff.com/roth-401k-for ... e-max.html )

Assuming the income tax rate stays similar now and in retirement:

Should I continue in the ROTH IRAs?

Since you will have 2 pensions, I would keep both IRAs as Roth.

When the ROTH TSP is offered should I switch to it?

Since you are already contributing to 2 Roth IRAs , I would probably stay with mostly traditional TSP. This will give you a good mix of post-taxed and pre-taxed contributions.

Since you are in the 25% tax bracket and do not list any taxable in your Portfolio, I'm assuming that your income is not low enough for the current traditional TSP contributions to push you down into the 15% range or high enough that you are maxing out the 2 IRAs and the TSP with some taxable left over. If you ever do hit the limit on the tax sheltered contributions, I would contribute enough as Roth to stay fully tax sheltered without any taxable retirement savings.

Is there anything you would recommend I change?

Your current setup is good, and near perfect if you are not comfortable with managing and rebalancing seperate funds. But I would probably use individual funds instead of TR funds for 3 main reasons:

Lower expense with admiral funds at Vanguard
The I fund does not include international emerging markets or Canada
The G fund is a unique bond fund only available with the TSP. It has a bond rate of return, yet with zero risk of loss.

To keep the same AA but with separate the funds: All bonds as G funds, all international as Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). Then fill the rest of the IRAs as Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX). And the rest of TSP as C and S funds (4 to 1 ratio to match total stock market). This would also allow you to add any tilt if wanted.

[steelerfan]

If your military pension is not taxable you might want to consider keeping the Traditional TSP so you get the tax deduction now and can withdraw in retirement when you might have a lower tax rate. If your military pension is taxable you might never be below the 25% tax rate.

90% of my military pension is taxable. The other 10% is disability - which is not taxable.

[steelerfan]

Bombshell: Big brain fart. My tax bracket is 15% - not 25 %. With all the tax advantaged contributions, kid in college, and charitable deductions, my taxable income is much lower than I had realized.

I guess this changes things - sorry about that everyone!

[retiredjg]

It does make the argument for using Roth TSP a little stronger. However, if you use Roth TSP, your taxable income will go up and you may no longer be in the 15% bracket. Time to play around with different scenarios.

[steelerfan]

It does make the argument for using Roth TSP a little stronger. However, if you use Roth TSP, your taxable income will go up and you may no longer be in the 15% bracket. Time to play around with different scenarios.

So I use ROTH TSP to the extent that I stay in the 15% bracket?

[retiredjg]

It does make the argument for using Roth TSP a little stronger. However, if you use Roth TSP, your taxable income will go up and you may no longer be in the 15% bracket. Time to play around with different scenarios.

So I use ROTH TSP to the extent that I stay in the 15% bracket?

That is certainly one of the choices. I think some people would say to use even more Roth than that.

I suspect that anything you get into Rothness at 15% is gravy and anything you get into Rothness at 25% is just breaking even with using traditional TSP.

Don't forget that this is a fairly minor decision. Don't give it more power than it really has. The important decisions are how much you save and your stock to bond ratio. This decision will not make that much difference for you in the end, in my opinion - so don't let it drive you nuts.

[Sean1215]

It does make the argument for using Roth TSP a little stronger. However, if you use Roth TSP, your taxable income will go up and you may no longer be in the 15% bracket. Time to play around with different scenarios.

So I use ROTH TSP to the extent that I stay in the 15% bracket?

That's what I would recommend. Contribute enough to the traditional TSP to lower your taxable income to the 15% bracket, then go roth contributions on the rest. That is actually the plan for my 457, except my employer is going to wait a extra year to see how other plans work out any issues before rolling it out.

[grabiner]

Bombshell: Big brain fart. My tax bracket is 15% - not 25 %. With all the tax advantaged contributions, kid in college, and charitable deductions, my taxable income is much lower than I had realized.

That makes the Roth TSP a very good deal; estimate how much income you need to put into the traditional TSP to get down to the 15% bracket, and put everything else in the Roth. (In addition, it may be temporary; in a few years, you won't have a kid in college, and you may get a promotion, so you will be in the 25% bracket.)

When you retire, you are likely to have a higher marginal tax rate because of the phase-in of Social Security taxation; if you retire in a 15% tax bracket but in the range in which every $1 of income makes 85 cents of SS taxable, your marginal tax rate will be 27.75%.