TSP only vs TSP and Vanguard IRA

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travelogue
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Why max TSP before outside IRA?

Post by travelogue » Sat Aug 12, 2017 4:34 pm

Hi folks,

Because of phase outs and desire to reduce taxable income today, I'm contributing to pre-tax "traditional" TSP (not "Roth") and have just opening a Vanguard traditional IRA. My question is, why is it better to max the TSP at $18,000 before starting on the $5,500 IRA limit? I know getting in at least the 5% matching level is critical, but beyond that is there a difference so long as the contributions are the same?

E.g., is there a difference between $15k in 100% TSP vs $10k TSP + $5k Vanguard IRA?

Many thanks!

travelogue
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TSP only vs TSP and Vanguard IRA

Post by travelogue » Sat Aug 12, 2017 4:38 pm

Is there a difference between $15k invested in pretax TSP vs $10k pretax TSP plus $5k Vanguard traditional IRA? (In both scenarios, the 5% TSP match is being met.)

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Re: TSP only vs TSP and Vanguard IRA

Post by LadyGeek » Sat Aug 12, 2017 5:29 pm

Welcome! I merged both of your questions together, as it's a similar discussion.
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bayview
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Re: Why max TSP before outside IRA?

Post by bayview » Sat Aug 12, 2017 5:44 pm

travelogue wrote:
Sat Aug 12, 2017 4:34 pm
Hi folks,

Because of phase outs and desire to reduce taxable income today, I'm contributing to pre-tax "traditional" TSP (not "Roth") and have just opening a Vanguard traditional IRA. My question is, why is it better to max the TSP at $18,000 before starting on the $5,500 IRA limit? I know getting in at least the 5% matching level is critical, but beyond that is there a difference so long as the contributions are the same?

E.g., is there a difference between $15k in 100% TSP vs $10k TSP + $5k Vanguard IRA?

Many thanks!
Welcome to Bogleheads!

Can you fund both TSP @ $18k and a Roth @ $5,500?

If so, you're good.

If not, the advantage to funding a Roth is to "call dibs" in this tax-free space for further down the line. The usual advice, if you can't do both, is to fund your TSP to the match ($5%), then max out the Roth, then go back to TSP and contribute as much as you can up to the total $18k limit.
I've been maxing out my TSP for quite a while now. I wish I'd heeded the advice above and funded a Roth, then gone back to TSP. :oops:
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Helo80
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Re: Why max TSP before outside IRA?

Post by Helo80 » Sat Aug 12, 2017 5:48 pm

travelogue wrote:
Sat Aug 12, 2017 4:34 pm
E.g., is there a difference between $15k in 100% TSP vs $10k TSP + $5k Vanguard IRA?


If you can max out both, $23.5, that would be ideal.

However, I'd rather have $5500 in Vanguard tIRA and whatever leftover money (after 5% match of course), go into traditional TSP. The TSP is great, has very low expense ratios, and the envy of many a non-fed employee out there. But, it's imperfect in that there are fewer fund choices available. A Vanguard tIRA would open the door to more investing opportunities with large, medium, and small value and growth funds.

Plus, many complain about the TSP withdrawal options down the road. I'm so far away from that point, that I have not explored all of TSP ins and outs of withdrawals. Plus, it'll probably change at least twice by the time I get there.

johan_s
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Re: TSP only vs TSP and Vanguard IRA

Post by johan_s » Sat Aug 12, 2017 5:52 pm

My wife and I are both federal employees. We contribute about 12% to the Trad TSP and try to max out two Roth IRAs at Vanguard. In the Roth, we try to approximate Total International and fill in the gaps in the TSP I Fund. We also hold some REIT and other stock index funds to meet our overall asset allocation. Roth IRAs are all stock; bonds are all in TSP G and F funds.

While there is talk about loosening the restrictions on TSP withdrawals, I would rather not have *all* my eggs in the TSP basket. So for us, we feel it's best to try and fully fund outside Roth IRAs, instead of maxing our TSP contributions. Of course, we will both have FERS pensions as well. We move a lot for work, so it's hard to gauge tax implications for more than a few years at a time. And we don't know where we will retire, so for us we feel the best plan is to diversify our retirement holdings across TSP/Vanguard ROTH. A few other members made that recommendation to me when I first posted my portfolio, after expressing some regret that all of their assets were tied up in TSP and 401k's.

Good luck.

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Re: TSP only vs TSP and Vanguard IRA

Post by Helo80 » Sat Aug 12, 2017 5:52 pm

travelogue wrote:
Sat Aug 12, 2017 4:38 pm
Is there a difference between $15k invested in pretax TSP vs $10k pretax TSP plus $5k Vanguard traditional IRA? (In both scenarios, the 5% TSP match is being met.)


Truth be told, based upon the complaints about TSP withdrawals at retirement age, I'd do the 1. TSP to match (5%), 2. tIRA to $5500, 3. whatever left over money, to TSP until you meet $18k.

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BL
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Re: TSP only vs TSP and Vanguard IRA

Post by BL » Sat Aug 12, 2017 6:15 pm

I believe you can roll over TSP directly to IRA when you retire. That would leave no question about withdrawals from TSP.

I am not saying that is the best choice. Having money in low-ER TSP, and having excellent bond choice there, may be much more important. So I would not clean out the TSP in case I wanted to move money back there.

Having a Roth IRA (or TSP) is great! No more tax on it ever, if you follow time and age requirements.

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FiveK
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Re: Why max TSP before outside IRA?

Post by FiveK » Sat Aug 12, 2017 6:36 pm

travelogue wrote:
Sat Aug 12, 2017 4:34 pm
My question is, why is it better to max the TSP at $18,000 before starting on the $5,500 IRA limit?
Filling the IRA limit after getting a 401k match is often correct, because the account fees in the IRA are lower than in the 401k.

Because the TSP accounts fees are so low, it can be better to fill the TSP before going to the IRA.
E.g., is there a difference between $15k in 100% TSP vs $10k TSP + $5k Vanguard IRA?
Other than the fees discussed above, if one is close to Earned Income Credit (EIC) eligibility the TSP (or 401k, 403b, etc.) can be preferable because the EIC is based on the lower of line 7 and line 37 on Form 1040. May not be pertinent in your case.

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Re: TSP only vs TSP and Vanguard IRA

Post by WanderingDoc » Sat Aug 12, 2017 6:46 pm

Helo80 wrote:
Sat Aug 12, 2017 5:52 pm
travelogue wrote:
Sat Aug 12, 2017 4:38 pm
Is there a difference between $15k invested in pretax TSP vs $10k pretax TSP plus $5k Vanguard traditional IRA? (In both scenarios, the 5% TSP match is being met.)


Truth be told, based upon the complaints about TSP withdrawals at retirement age, I'd do the 1. TSP to match (5%), 2. tIRA to $5500, 3. whatever left over money, to TSP until you meet $18k.
Would you only do the tIRA if you weren't able to do a Roth IRA?
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Helo80
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Re: TSP only vs TSP and Vanguard IRA

Post by Helo80 » Sat Aug 12, 2017 7:49 pm

WanderingDoc wrote:
Sat Aug 12, 2017 6:46 pm
Would you only do the tIRA if you weren't able to do a Roth IRA?


Personally, I'm roth IRA and roth TSP. In the context of OP's question, they implied that they are interested in reducing their overall taxable wages and going traditional TSP and tIRA.

Plus, roth IRA can be done by basically anyone with taxable wages as the backdoor roth IRA option exists now. But, in the broader sense of the question... yeah, even if you earned $5 million per year in salary and were ineligible for a Roth IRA and the backdoor roth IRA option did not exist, you should still take advantage of the $5500 tIRA as it'd save you 40% of whatever $5500 is on federal taxes.

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Re: TSP only vs TSP and Vanguard IRA

Post by WanderingDoc » Sat Aug 12, 2017 7:55 pm

Helo80 wrote:
Sat Aug 12, 2017 7:49 pm
WanderingDoc wrote:
Sat Aug 12, 2017 6:46 pm
Would you only do the tIRA if you weren't able to do a Roth IRA?


Personally, I'm roth IRA and roth TSP. In the context of OP's question, they implied that they are interested in reducing their overall taxable wages and going traditional TSP and tIRA.

Plus, roth IRA can be done by basically anyone with taxable wages as the backdoor roth IRA option exists now. But, in the broader sense of the question... yeah, even if you earned $5 million per year in salary and were ineligible for a Roth IRA and the backdoor roth IRA option did not exist, you should still take advantage of the $5500 tIRA as it'd save you 40% of whatever $5500 is on federal taxes.
No it wouldn't, in the context of also utilizing a 401k (as is the OP, and often the #1 step recommended to fund first) if earning more than $75K or so. It is not tax deductable.
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Helo80
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Re: TSP only vs TSP and Vanguard IRA

Post by Helo80 » Sat Aug 12, 2017 8:16 pm

WanderingDoc wrote:
Sat Aug 12, 2017 7:55 pm

No it wouldn't, in the context of also utilizing a 401k (as is the OP, and often the #1 step recommended to fund first) if earning more than $75K or so. It is not tax deductable.

Hmm... right you are per IRS. That's unfortunate though because $75k is great money in some areas, and barely enough in others. If I were ever elected to Congress, I'd be one of the most pro-retirement savings legislators out there and try to change these rules to encourage retirement planning and savings early on. I'm sort of disappointed that there are deduction limits on tIRAs.

But... I think you might be able to still do a tIRA contribution (albeit no tax deduction) and then backdoor roth IRA that money, no?

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FiveK
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Re: TSP only vs TSP and Vanguard IRA

Post by FiveK » Sat Aug 12, 2017 8:50 pm

Helo80 wrote:
Sat Aug 12, 2017 8:16 pm
Hmm... right you are per IRS. That's unfortunate though because $75k is great money in some areas, and barely enough in others. If I were ever elected to Congress, I'd be one of the most pro-retirement savings legislators out there and try to change these rules to encourage retirement planning and savings early on. I'm sort of disappointed that there are deduction limits on tIRAs.

But... I think you might be able to still do a tIRA contribution (albeit no tax deduction) and then backdoor roth IRA that money, no?
No need to use the backdoor if one meets the limits for the Amount of Roth IRA Contributions That You Can Make For 2017

travelogue
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Re: Why max TSP before outside IRA?

Post by travelogue » Sun Aug 13, 2017 1:50 am

bayview wrote:
Sat Aug 12, 2017 5:44 pm

Can you fund both TSP @ $18k and a Roth @ $5,500?

If so, you're good.

If not, the advantage to funding a Roth is to "call dibs" in this tax-free space for further down the line. The usual advice, if you can't do both, is to fund your TSP to the match ($5%), then max out the Roth, then go back to TSP and contribute as much as you can up to the total $18k limit.
I've been maxing out my TSP for quite a while now. I wish I'd heeded the advice above and funded a Roth, then gone back to TSP. :oops:
Hmm, I'm trying to understand this. It looks like there are lots of interactions. My spouse is recently re-employed and has an employer-sponsored account at TIAA/CREF.

Here's an article on the issue: https://www.fedsmith.com/2015/12/09/fun ... s-in-2016/

If I'm reading it correctly (and some of the other comments above) at our income levels the tIRA might not net any deductions, is tax deferred, but at withdrawal earnings are taxed at ordinary income rates. :annoyed

Thanks for your all help and info!

travelogue
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Re: TSP only vs TSP and Vanguard IRA

Post by travelogue » Sun Aug 13, 2017 2:48 am

OK, back after re-reading the posts above and a few more resources. We're definitely disqualified from deducting tIRA contributions based on income limitations. It seems that after I max the TSP at $18k (and $24k after 50), I'll need to calculate modified AGI to see if we're above or below the mAGI limits for Roth contributions.

If we've above (quite possible -- we're in a high cost of living area) one option might be a "Backdoor" Roth IRA contribution?

In looking at this Morningstar article on Backdoor Roth mistakes, I'm double checking to make sure we don't have any other tIRA assets in disused accounts. It seems we're OK, as all I think we have outside TSP is a small-ish amount my wife has in a Roth IRA with Vanguard (VFIAX!) from a job years ago and her new 403b.

rkhusky
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Re: TSP only vs TSP and Vanguard IRA

Post by rkhusky » Sun Aug 13, 2017 6:27 am

One disadvantage of the TSP is the I Fund, which does not include Emerging Markets, Small Cap International, or Canada. You could supplement the TSP by using Total International in an IRA.

retiredjg
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Re: TSP only vs TSP and Vanguard IRA

Post by retiredjg » Sun Aug 13, 2017 6:48 am

If you are considering using the back door, I suggest that you download Form 8606 for 2016 and pretend you have already done a back door and pencil your way through the form. If you cannot make the form work right, don't use the back door.

Do not assume your tax preparer (if you use one) will know what to do on your taxes. Many do not.

deskjockey
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Re: TSP only vs TSP and Vanguard IRA

Post by deskjockey » Sun Aug 13, 2017 9:08 am

travelogue wrote:
Sun Aug 13, 2017 2:48 am
OK, back after re-reading the posts above and a few more resources. We're definitely disqualified from deducting tIRA contributions based on income limitations. It seems that after I max the TSP at $18k (and $24k after 50), I'll need to calculate modified AGI to see if we're above or below the mAGI limits for Roth contributions.

If we've above (quite possible -- we're in a high cost of living area) one option might be a "Backdoor" Roth IRA contribution?

In looking at this Morningstar article on Backdoor Roth mistakes, I'm double checking to make sure we don't have any other tIRA assets in disused accounts. It seems we're OK, as all I think we have outside TSP is a small-ish amount my wife has in a Roth IRA with Vanguard (VFIAX!) from a job years ago and her new 403b.
Yes, the backdoor option is what folks whose income is too high to make a direct Roth contribution have to use to put money in a Roth. Definitely research how to do it before you take the plunge, since the details can trip you up. You cal also ask for help with the process here once you've started it (and at tax time).

Since you're at the income limit for the front-door Roth, I'm assuming you're in the 25 or 28% tax bracket, and, since you're thinking of maxing out TSP and an IRA, I assume you've got more savings than you can pack away in tax deferred space. If so, you may want to crunch the numbers to see if the Roth TSP might be a better place to put your funds. Yes, your taxes today will go up, but you may come out ahead when you retire. Here's a Finance Buff blog post that lays out the case for going this route. This decision is highly dependent on your particular tax, earnings, and pension situation, so you need to crunch the numbers (and make a guess/judgment call about your tax rate in retirement) before making the decision. I personally have chosen not to do so, because I'm hit by the AMT and other aspects of my tax situation make it more favorable to go the traditional TSP route. For many others, however, using the Roth TSP instead of traditional TSP is decidedly a better option. This thread and this other one have some discussion of the nuances.

In addition, don't be too concerned about the TSP's limited withdrawal options. Check out the wiki for some interesting info on how the limited options can be made to work.

retiredjg
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Re: TSP only vs TSP and Vanguard IRA

Post by retiredjg » Sun Aug 13, 2017 12:46 pm

You might also avoid the back door if you are not filling your TSP. Simply put what would go into Roth IRA into Roth TSP.

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