Traditional TSP and Roth TSP

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Vol
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Traditional TSP and Roth TSP

Post by Vol » Wed Sep 19, 2018 6:31 pm

I just got a federal job. It says that I am automatically 3% on Traditional TSP Tax-deferred Contributions. I increased it to 5% because I heard Uncle Sam does 5% matching. What is Roth TSP Contributions? Should I put money in that too? What is the difference? Which is better? :oops:

Tdubs
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Re: Traditional TSP and Roth TSP

Post by Tdubs » Wed Sep 19, 2018 7:23 pm

Yes, 5% is the federal match--the federal portion always goes to traditional TSP. So you could put all of your contribution in Roth and with the federal match going to traditional you would split the difference.

https://www.tsp.gov/PlanParticipation/E ... index.html

Your choice between Roth and traditional TSP depends a lot on personal circumstances--whether you are at the beginning of your career or joining federal service late in life. If it is the latter and you don't have any other pension plan, you may be someone who will make much less in retirement than during your professional career. If so, traditional may be best since you will be in a lower tax bracket when drawing out your TSP traditional in retirement.

Another consideration. Will you move to a state with no income tax in retirement? If so traditional may again be best since your taxes will be lower in retirement when you tap your TSP.

On the other hand, the current tax cut will only last about seven years or so and then taxes likely go back up. So if you think you will have the same income in retirement as you do now, putting at least some of your contributions in Roth now to take advantage of current low tax brackets makes sense.

3504PIR
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Re: Traditional TSP and Roth TSP

Post by 3504PIR » Thu Sep 20, 2018 2:38 am

Traditional vs Roth depends on your personal situation as previously mentioned. Roth is taxed now and then grows tax free. Traditional is not taxed now but when you withdraw it at retirement.

You’ll be matched after you’re vested, usually after a year. I think that 1% match is immediate and the remaining begins after a year, but I recommend you pay a visit to the OPM website to fully understand this along with you previous post about FERS if I recall correctly.

I also recommend you do some reading on this board and elsewhere about what it really takes to get to a well funded retirement. Contributing 5% is not going to get you there more than likely. When I began as a federal worker I maxed out my contributions from day 1. That way, I never missed the money and my accumulation was meaningful as I only planned to work for 10 years. The max for this year is $18,500. While you may not be able to contribute that amount between now and December 31st, I’d recommend increasing your contributions to at least 15% right now. Then in mid December when we are primed to adjust our contributions for 2019, find out the max for 2019 and divide the max by 26 pay periods to find out how much you can begin deducting. If the $700ish is too much then I strongly recommend upping your contributions to 20% prior to Christmas so it kicks in on the first pay period in 2019. Bottom line is that you should contribute at least 15% to 20% and max it if you can. It will mean a lot when it comes time to retire.

Time is the most important component in your quest for a great retirement. The more you save now will compound to give you the result you will want when it’s time to retire.

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FiveK
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Re: Traditional TSP and Roth TSP

Post by FiveK » Thu Sep 20, 2018 3:18 am

See Traditional versus Roth - Bogleheads.

Neither is inherently better than the other. If in doubt, traditional is better for most.

See also Investment Order, which should support 3504PIR's comments about a well funded retirement.

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grabiner
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Re: Traditional TSP and Roth TSP

Post by grabiner » Thu Sep 20, 2018 5:42 pm

Given your other posts, I believe you work in Florida. This makes the Roth TSP more attractive, as Florida does not tax your salary, and if you retire in a state which does have an income tax, you will pay state tax on traditional but not Roth TSP withdrawals.

Note that contributing 5% to the Roth TSP will cost you more out of pocket. Therefore, if you would have difficulty affording a 5% Roth contribution, the traditional TSP is better, as you spend less out of pocket to get the full match.

You can re-evaluate your decision regularly. If you get promoted, you will have more income available for retirement savings, and thus you can increase your TSP contribution. You can also switch between traditional and Roth as your tax situation changes.
Wiki David Grabiner

Vol
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Re: Traditional TSP and Roth TSP

Post by Vol » Thu Sep 20, 2018 5:54 pm

Gee, thanks for all the info. Yes, I live in Florida. Work for the VA. I guess traditional TSP is the way to go as I am getting older than I would like to admit. I spent my life being stupid and wasting time and money, so I figure I better get my ass in gear for retirement or later on I will be sorry. But why does my myPay say the max I can contribute is 9999? Is that because I am only a WG10? The lady at the HR office told me I don't make enough to max out the TSP.

retiredjg
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Re: Traditional TSP and Roth TSP

Post by retiredjg » Thu Sep 20, 2018 5:56 pm


Tdubs
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Re: Traditional TSP and Roth TSP

Post by Tdubs » Thu Sep 20, 2018 7:49 pm

Vol wrote:
Thu Sep 20, 2018 5:54 pm
Gee, thanks for all the info. Yes, I live in Florida. Work for the VA. I guess traditional TSP is the way to go as I am getting older than I would like to admit. I spent my life being stupid and wasting time and money, so I figure I better get my ass in gear for retirement or later on I will be sorry. But why does my myPay say the max I can contribute is 9999? Is that because I am only a WG10? The lady at the HR office told me I don't make enough to max out the TSP.
As far as I know, you should be able to contribute $18,500 (plus catchup). I don't know if your grade makes a difference.

https://www.tsp.gov/PlanParticipation/E ... imits.html

Since you live in Florida, a Roth might not be a bad option. As was noted above, it will cost you more out of pocket now, but if you feel like you are behind in your retirement savings maxing out in a Roth will give you more later since it won't be taxed when you withdraw it. But, of course, you have to be able to afford that now. A lot depends on the tax bracket you are in now and the one you will be in when you retire.

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FiveK
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Re: Traditional TSP and Roth TSP

Post by FiveK » Thu Sep 20, 2018 8:39 pm

Tdubs wrote:
Thu Sep 20, 2018 7:49 pm
...if you feel like you are behind in your retirement savings maxing out in a Roth will give you more later....
A lot depends on the tax bracket you are in now and the one you will be in when you retire.
Someone "behind in...retirement savings" would likely be in lower tax bracket in retirement. If so, traditional is a better choice now.

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VictoriaF
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Re: Traditional TSP and Roth TSP

Post by VictoriaF » Thu Sep 20, 2018 8:52 pm

Vol wrote:
Thu Sep 20, 2018 5:54 pm
Gee, thanks for all the info. Yes, I live in Florida. Work for the VA. I guess traditional TSP is the way to go as I am getting older than I would like to admit. I spent my life being stupid and wasting time and money, so I figure I better get my ass in gear for retirement or later on I will be sorry. But why does my myPay say the max I can contribute is 9999? Is that because I am only a WG10? The lady at the HR office told me I don't make enough to max out the TSP.
Grabiner's point is that if you live in Florida you should contribute to Roth TSP, because you are not paying state taxes on the contributions.

The lady at the HR office is incorrect. You can contribute up to $18,500/year into TSP if you are under the age of 50, and up to $24,500/year if you are 50 years old, or older.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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FiveK
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Re: Traditional TSP and Roth TSP

Post by FiveK » Thu Sep 20, 2018 10:50 pm

VictoriaF wrote:
Thu Sep 20, 2018 8:52 pm
Grabiner's point is that if you live in Florida you should contribute to Roth TSP, because you are not paying state taxes on the contributions.
Perhaps he meant "work in Florida...makes the Roth TSP more attractive" than it would be in a state with income tax, not more attractive than a traditional TSP.

E.g., one could assume retirement in Florida, in which case only the federal rates matter. It's also possible that the combined fed+state rate would be lower in retirement even with a move to a state with income tax.

Tdubs
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Re: Traditional TSP and Roth TSP

Post by Tdubs » Fri Sep 21, 2018 4:37 am

FiveK wrote:
Thu Sep 20, 2018 8:39 pm
Tdubs wrote:
Thu Sep 20, 2018 7:49 pm
...if you feel like you are behind in your retirement savings maxing out in a Roth will give you more later....
A lot depends on the tax bracket you are in now and the one you will be in when you retire.
Someone "behind in...retirement savings" would likely be in lower tax bracket in retirement. If so, traditional is a better choice now.
Likely, but if your goal is to amass as much as possible in a retirement account for retirement income, Roth contributions would give him more after tax. And while he may have lower income in retirement, the possible return to the old tax brackets (after the current cuts expire) at the federal level might leave him in a higher bracket by the time he retires. hard to know.

rkhusky
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Re: Traditional TSP and Roth TSP

Post by rkhusky » Fri Sep 21, 2018 6:35 am

Tdubs wrote:
Fri Sep 21, 2018 4:37 am
Likely, but if your goal is to amass as much as possible in a retirement account for retirement income, Roth contributions would give him more after tax. And while he may have lower income in retirement, the possible return to the old tax brackets (after the current cuts expire) at the federal level might leave him in a higher bracket by the time he retires. hard to know.
True. If OP is maxing out all tax-advantaged accounts, such as TSP and IRA's, including catch-up limits for those age 50+, and the marginal tax rate that the OP would pay in retirement is equal or more than he is paying currently, then, yes, Roth TSP would be better.

But, if the the OP is not maxing TSP and IRA's and the tax rates now and in retirement are the same, then Roth and Traditional are exactly the same. And, if the tax rate in retirement is less than now, which it usually is, then Traditional is better. (Although, the latter can be complex to estimate when a pension and SS taxation are thrown in the mix.)

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FiveK
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Re: Traditional TSP and Roth TSP

Post by FiveK » Fri Sep 21, 2018 11:48 am

Tdubs wrote:
Fri Sep 21, 2018 4:37 am
FiveK wrote:
Thu Sep 20, 2018 8:39 pm
Tdubs wrote:
Thu Sep 20, 2018 7:49 pm
...if you feel like you are behind in your retirement savings maxing out in a Roth will give you more later....
A lot depends on the tax bracket you are in now and the one you will be in when you retire.
. If so, traditional is a better choice now.
Likely, but if your goal is to amass as much as possible in a retirement account for retirement income, Roth contributions would give him more after tax.
Perhaps we are stumbling over the definition of "retirement account". Are you limiting that to "tax-advantaged" only?

In any case, how do Roth contributions give one "more after tax" if, for example, the current marginal rate is 24% and the retirement marginal rate is 15%?
And while he may have lower income in retirement, the possible return to the old tax brackets (after the current cuts expire) at the federal level might leave him in a higher bracket by the time he retires. hard to know.
Agreed - some prognostication needed, and everyone's situation is different. It just seems likely that someone "behind in...retirement savings" would likely be in lower tax bracket in retirement.

Tdubs
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Re: Traditional TSP and Roth TSP

Post by Tdubs » Fri Sep 21, 2018 7:07 pm

FiveK wrote:
Fri Sep 21, 2018 11:48 am
Tdubs wrote:
Fri Sep 21, 2018 4:37 am
FiveK wrote:
Thu Sep 20, 2018 8:39 pm
Tdubs wrote:
Thu Sep 20, 2018 7:49 pm
...if you feel like you are behind in your retirement savings maxing out in a Roth will give you more later....
A lot depends on the tax bracket you are in now and the one you will be in when you retire.
. If so, traditional is a better choice now.
Likely, but if your goal is to amass as much as possible in a retirement account for retirement income, Roth contributions would give him more after tax.
Perhaps we are stumbling over the definition of "retirement account". Are you limiting that to "tax-advantaged" only?

In any case, how do Roth contributions give one "more after tax" if, for example, the current marginal rate is 24% and the retirement marginal rate is 15%?
And while he may have lower income in retirement, the possible return to the old tax brackets (after the current cuts expire) at the federal level might leave him in a higher bracket by the time he retires. hard to know.
Agreed - some prognostication needed, and everyone's situation is different. It just seems likely that someone "behind in...retirement savings" would likely be in lower tax bracket in retirement.
Yes, we are both guessing because we don't know what his retirement income will be. But let's say he is making $90k now and is married filing jointly. His marginal rate would be 12%. What if he doesn't retire until after the tax brackets reset in about seven years? He could have just $60k in retirement income and be in the 15% bracket. If that is the case, he should go Roth now. It is insurance against that uncertainty.

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FiveK
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Re: Traditional TSP and Roth TSP

Post by FiveK » Fri Sep 21, 2018 7:39 pm

Tdubs wrote:
Fri Sep 21, 2018 7:07 pm
Yes, we are both guessing because we don't know what his retirement income will be. But let's say he is making $90k now and is married filing jointly. His marginal rate would be 12%. What if he doesn't retire until after the tax brackets reset in about seven years? He could have just $60k in retirement income and be in the 15% bracket. If that is the case, he should go Roth now. It is insurance against that uncertainty.
Perhaps we both agree on something similar to the following?
If $40K needs to come from traditional account withdrawals, that implies a $1 million balance using a 4% withdrawal ratio. If the expected traditional balance at retirement will deliver less than that $40K (or whatever is needed), more traditional now is likely better. If the expected traditional balance at retirement will deliver at least that, more Roth now is likely better.

retiredjg
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Re: Traditional TSP and Roth TSP

Post by retiredjg » Sat Sep 22, 2018 8:55 am

FiveK wrote:
Fri Sep 21, 2018 11:48 am
It just seems likely that someone "behind in...retirement savings" would likely be in lower tax bracket in retirement.
If that person is married, perhaps.

If this poster is single, there is a very good chance s/he is in the 22% bracket now and will be in the 25% bracket in retirement if taxes do revert to earlier rates as scheduled. Or 22% now and 22% later if tax rates do not revert. That could mean that using Roth TSP is preferable.


Vol, as you can see it is difficult to help you knowing so little about your situation.

Back to your original question....Roth TSP means you would pay the taxes now on the money you save. With the regular TSP, you would pay the taxes later in retirement as you take the money out of the TSP.

Knowing something about your age, your tax bracket now and your marital status as well would help us help you.

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