Increase TSP (401K) contribution or invest outside?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
conservativeinvestor
Posts: 36
Joined: Tue Feb 05, 2019 12:14 pm

Increase TSP (401K) contribution or invest outside?

Post by conservativeinvestor » Fri Feb 22, 2019 1:19 pm

I cannot afford to max out my TSP (401K) contributions at $19,000 per year.

I currently put 15% into the Roth TSP (after tax) and get a 5% Traditional (pretax) match.

My tax refund is going to be used to pay off a car loan so that will free up some extra cash each month which I would like to invest some but not all of.

Option 1:
Increase TSP contributions from 15% to 17%

Option 2:
Open an IRA account or other investment account and contribute 2% to it.


It seems like most of you max out your 401K and then invest in other accounts because you aren't allowed to put more into your 401K.

For someone who can't afford to max their 401K is it best to put as much in as possible or is there a point when opening a separate investment account makes sense?

User avatar
Watty
Posts: 18039
Joined: Wed Oct 10, 2007 3:55 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by Watty » Fri Feb 22, 2019 1:35 pm

You might want to start up a seperate car fund to be able to pay cash for your next car.

If you have other shorter term goals like saving up a downpayment for a house or college savings for kids might also make sense.
conservativeinvestor wrote:
Fri Feb 22, 2019 1:19 pm
It seems like most of you max out your 401K and then invest in other accounts because you aren't allowed to put more into your 401K.
Many people run into income limits so that they cannot make deductible IRA contributions or Roth IRA contributions so what they do may not apply to you.

https://www.irs.gov/retirement-plans/ir ... ion-limits

I don't know why you would use a Roth TSP and a deductible IRA unless you are right on the border of a tax bracket so you might want to explain your reasoning on that.

If it does make sense to split the account types, which is possible, then you might want to do it the other way around and use a Roth IRA and a traditional TSP instead. The reason for this is that you can use the Roth IRA as an emergency fund if you need to.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

User avatar
ruralavalon
Posts: 17076
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Increase TSP (401K) contribution or invest outside?

Post by ruralavalon » Fri Feb 22, 2019 2:51 pm

conservativeinvestor wrote:
Fri Feb 22, 2019 1:19 pm
I cannot afford to max out my TSP (401K) contributions at $19,000 per year.

I currently put 15% into the Roth TSP (after tax) and get a 5% Traditional (pretax) match.

My tax refund is going to be used to pay off a car loan so that will free up some extra cash each month which I would like to invest some but not all of.

Option 1:
Increase TSP contributions from 15% to 17%

Option 2:
Open an IRA account or other investment account and contribute 2% to it.


It seems like most of you max out your 401K and then invest in other accounts because you aren't allowed to put more into your 401K.

For someone who can't afford to max their 401K is it best to put as much in as possible or is there a point when opening a separate investment account makes sense?
It's likely better to increase your contributions to the Thrift Savings Plan (TSP). The TSP offers excellent, very diversified, index funds with very low expense ratios. It also offers the advantage of automatic deductions from payroll.

The usual reason for contributing to an IRA, rather than to a work-based plan, is a bad or mediocre work-based plan which offers poor funds with high expense ratios. Obviously that does not apply to the TSP.

Please see the wiki article "Prioritizing Investments". "If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ExitStageLeft
Posts: 1782
Joined: Sat Jan 20, 2018 4:02 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by ExitStageLeft » Fri Feb 22, 2019 4:14 pm

Have you looked into the impact of putting some or all of that TSP contribution into traditional tax-deferred? That will lower your reported income, resulting in lower income taxes.

There are a lot of things we don't know about your individual situation, so it's hard to know what's your best recommendation. You would benefit greatly from a portfolio review using the format provided in the Asking Portfolio Questions thread: viewtopic.php?f=1&t=6212

Living Free
Posts: 377
Joined: Thu Jul 19, 2018 7:31 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by Living Free » Fri Feb 22, 2019 4:26 pm

conservativeinvestor wrote:
Fri Feb 22, 2019 1:19 pm

Option 1:
Increase TSP contributions from 15% to 17%

Option 2:
Open an IRA account or other investment account and contribute 2% to it.


It probably won't make much difference, provided you invest in a low cost provider's IRA with low fee funds (from what I've hear the TSP is a great plan with very low fees).
But if you do the IRA, you'll then have to deal with the hassle of opening and keeping track of another account and you might not be able to find an account/fund with similar low cost to the TSP. So I'd probably just keep things simple.

delamer
Posts: 9481
Joined: Tue Feb 08, 2011 6:13 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by delamer » Fri Feb 22, 2019 4:36 pm

ExitStageLeft wrote:
Fri Feb 22, 2019 4:14 pm
Have you looked into the impact of putting some or all of that TSP contribution into traditional tax-deferred? That will lower your reported income, resulting in lower income taxes.

There are a lot of things we don't know about your individual situation, so it's hard to know what's your best recommendation. You would benefit greatly from a portfolio review using the format provided in the Asking Portfolio Questions thread: viewtopic.php?f=1&t=6212
Good advice.

If you are early in your career and still fairly low income, then going all-in with the Roth might make sense.

But if your marginal federal rate is 22% or higher, then putting some of your contributions into the traditional TSP is a good idea.

Topic Author
conservativeinvestor
Posts: 36
Joined: Tue Feb 05, 2019 12:14 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by conservativeinvestor » Fri Feb 22, 2019 4:48 pm

delamer wrote:
Fri Feb 22, 2019 4:36 pm

If you are early in your career and still fairly low income, then going all-in with the Roth might make sense.

But if your marginal federal rate is 22% or higher, then putting some of your contributions into the traditional TSP is a good idea.
I have 20 years until retirement.

I am in the 22% tax bracket and had been doing a mix of pretax and after tax but when the new tax rules took effect I changed everything to after tax. If the tax rules expire in 2025 then I plan on going back to a mix of both. I don't think even in retirement I'll be in a lower bracket than now.

Topic Author
conservativeinvestor
Posts: 36
Joined: Tue Feb 05, 2019 12:14 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by conservativeinvestor » Fri Feb 22, 2019 4:58 pm

I don't think I asked the right question initially. I should have made it more general.

If there were no limits on 401K contributions would there still be an advantage to having other investment accounts? (assuming the 401K had a good choice of investments to choose from)

Ybsybs
Posts: 535
Joined: Thu Aug 28, 2014 4:28 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by Ybsybs » Fri Feb 22, 2019 5:18 pm

If I were you, I'd put all the retirement contributions you can afford to make in your TSP. I don't see a value in splitting them up.

If instead of TSP, you had a 401k which could have not very good investment options, then I'd recommend contributing enough to get the full match available and then using an IRA for the rest.

retiredjg
Posts: 38959
Joined: Thu Jan 10, 2008 12:56 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by retiredjg » Fri Feb 22, 2019 5:36 pm

conservativeinvestor wrote:
Fri Feb 22, 2019 4:58 pm
I don't think I asked the right question initially. I should have made it more general.

If there were no limits on 401K contributions would there still be an advantage to having other investment accounts? (assuming the 401K had a good choice of investments to choose from)
Having a Roth IRA on the side could have some benefit. It could be used as a secondary emergency fund or a location from which to draw part of a house down payment. This is because your contributions, but not your earnings, are available any time for any reason with no tax or penalty.

Another reason is to buy some fund that is not available in the TSP. Since you didn't mention this, I doubt it is of interest to you but some people would use it for that.

Even if you don't end up contributing much to Roth IRA, it is a good idea to start one before you reach retirement age because at least 1 benefit of Roth IRA (earnings are not taxed) does not kick in until the Roth IRA itself is 5 years old. You want to start that clock before your 60's not after your 60's have started if you have a choice.

I don't like having a lot of accounts but I think there is some flexibility in having at least 2 different types of accounts.

Living Free
Posts: 377
Joined: Thu Jul 19, 2018 7:31 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by Living Free » Sat Feb 23, 2019 8:26 pm

retiredjg wrote:
Fri Feb 22, 2019 5:36 pm

Even if you don't end up contributing much to Roth IRA, it is a good idea to start one before you reach retirement age because at least 1 benefit of Roth IRA (earnings are not taxed) does not kick in until the Roth IRA itself is 5 years old. You want to start that clock before your 60's not after your 60's have started if you have a choice.
Great point -- I just learned something new about Roth IRAs!

02nz
Posts: 2984
Joined: Wed Feb 21, 2018 3:17 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by 02nz » Sat Feb 23, 2019 8:41 pm

conservativeinvestor wrote:
Fri Feb 22, 2019 4:48 pm
delamer wrote:
Fri Feb 22, 2019 4:36 pm

If you are early in your career and still fairly low income, then going all-in with the Roth might make sense.

But if your marginal federal rate is 22% or higher, then putting some of your contributions into the traditional TSP is a good idea.
I have 20 years until retirement.

I am in the 22% tax bracket and had been doing a mix of pretax and after tax but when the new tax rules took effect I changed everything to after tax. If the tax rules expire in 2025 then I plan on going back to a mix of both. I don't think even in retirement I'll be in a lower bracket than now.
You may well be in a lower tax bracket than now. Yes, you get a pension, but the FERS percentage isn't that high. If you're married when you retire and your spouse doesn't have a pension, you're likely to be in a lower bracket than 22%.

rkhusky
Posts: 7829
Joined: Thu Aug 18, 2011 8:09 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by rkhusky » Sat Feb 23, 2019 9:30 pm

conservativeinvestor wrote:
Fri Feb 22, 2019 4:48 pm
delamer wrote:
Fri Feb 22, 2019 4:36 pm

If you are early in your career and still fairly low income, then going all-in with the Roth might make sense.

But if your marginal federal rate is 22% or higher, then putting some of your contributions into the traditional TSP is a good idea.
I have 20 years until retirement.

I am in the 22% tax bracket and had been doing a mix of pretax and after tax but when the new tax rules took effect I changed everything to after tax. If the tax rules expire in 2025 then I plan on going back to a mix of both. I don't think even in retirement I'll be in a lower bracket than now.
Below assumes married, filing jointly (MFJ).

Will your pension be $100K+/yr in today's dollars? If not, what do you expect your pension to be?

Do you expect to retire before age 70? If significantly before, you can convert Traditional to Roth in a lower tax bracket.

Do you expect your retirement account to greatly exceed $1M? The first year (age 70.5) RMD for a $1M Traditional account is about $36.5K. Will that plus your pension exceed $100K?

Do your yearly expenses approach $100K, such that you would need to withdraw that amount to maintain your lifestyle?

Contributing enough in Traditional to get down to the 12% bracket makes more sense to me. Perhaps you could even max your TSP contribution that way.

User avatar
LinusP
Posts: 180
Joined: Fri May 18, 2018 10:29 am

Re: Increase TSP (401K) contribution or invest outside?

Post by LinusP » Sat Feb 23, 2019 10:08 pm

retiredjg wrote:
Fri Feb 22, 2019 5:36 pm
Having a Roth IRA on the side could have some benefit. It could be used as a secondary emergency fund or a location from which to draw part of a house down payment. This is because your contributions, but not your earnings, are available any time for any reason with no tax or penalty.
Note that TSP loans can be a great option - if you already have over $50k in the G fund, you could take out up to $50k, pay yourself back over 1 to 5 years, and not lose any ground on your retirement savings. Note: if the G fund rate rises, you could lose a little, since you're repaying yourself at the rate from when you took out the loan rather than collecting interest at the current rate, but this is relatively minor.

Might eliminate that particular reason to consider a separate Roth IRA, depending on circumstances.

retiredjg
Posts: 38959
Joined: Thu Jan 10, 2008 12:56 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by retiredjg » Sat Feb 23, 2019 11:03 pm

02nz wrote:
Sat Feb 23, 2019 8:41 pm
conservativeinvestor wrote:
Fri Feb 22, 2019 4:48 pm
delamer wrote:
Fri Feb 22, 2019 4:36 pm

If you are early in your career and still fairly low income, then going all-in with the Roth might make sense.

But if your marginal federal rate is 22% or higher, then putting some of your contributions into the traditional TSP is a good idea.
I have 20 years until retirement.

I am in the 22% tax bracket and had been doing a mix of pretax and after tax but when the new tax rules took effect I changed everything to after tax. If the tax rules expire in 2025 then I plan on going back to a mix of both. I don't think even in retirement I'll be in a lower bracket than now.
You may well be in a lower tax bracket than now. Yes, you get a pension, but the FERS percentage isn't that high. If you're married when you retire and your spouse doesn't have a pension, you're likely to be in a lower bracket than 22%.
The operative words in this last comment are "if you're married". A single person on even a FERS pension will probably never be in a lower bracket than 22% unless tax rates drop again. I don't think many people expect that to happen although it is certainly not impossible.

pdavi21
Posts: 1296
Joined: Sat Jan 30, 2016 4:04 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by pdavi21 » Sat Feb 23, 2019 11:06 pm

Trad 401k is better than trad IRA. ROTH IRA is better than ROTH 401k.
Almost always; max accordingly (after getting your match).
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

ExitStageLeft
Posts: 1782
Joined: Sat Jan 20, 2018 4:02 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by ExitStageLeft » Sun Feb 24, 2019 2:15 pm

retiredjg wrote:
Sat Feb 23, 2019 11:03 pm
...
The operative words in this last comment are "if you're married". A single person on even a FERS pension will probably never be in a lower bracket than 22% unless tax rates drop again. I don't think many people expect that to happen although it is certainly not impossible.
This is a good point that I think could use a little further consideration. I like to run the numbers, so here's a sketch of a couple scenarios for a FERS employee retiring this year. I'm working in real dollars and assuming current FERS rules and taxes going forward. Looking at tax bracket at 70, assuming SS is delayed until then. PIA is a bit of a guess, so tweak one way or the other as suits you.

40 years of service, age 62, high three of $110,000
FERS pension = $48,400 (Age 62 gets a 10% boost)
SS at 70 = $35,000
AGI = $78,150 assuming SS is 85% taxable
Working tax bracket = 22% whether single or MFJ
If single, this retiree is deep into the 22% bracket. If MFJ with a low-earner spouse, then with spousal SS added in there is still about $10k headroom in the 12% bracket that could be used to pull from tax-deferred. IF MFJ and the spouse has a pension or SS that eats up that headroom then they are in the same bracket in retirement as working.

30 years of service, age 57, high three of $80,000
FERS pension = $24,000
SS at 70 = $24,000
Working tax bracket = 22% if single, 12% if MFJ
Retirement fixed income max AGI = $44,400
Taxable income = $32,200
If single, the retirement tax bracket is 12% with $7,275 of headroom. If MFJ with a low-earner spouse then taxable income would be around $54,600 and they wouldn't hit the 22% bracket until taxable income is $78,950. If MFJ with spouse having the same level of pension and SS then their AGI would be $88,800 and taxable income would be $64,400. That gives $14,550 of headroom in the 12% bracket.

For someone working 40+ years and getting the 10% premium at age 62, there's a good chance they will be in the same bracket just with pensions and SS. For someone retiring with 30 years at minimum retirement age, pension and SS alone are not enough to kick them up into the working tax bracket.

peseta
Posts: 116
Joined: Mon Mar 09, 2015 11:40 pm

Re: Increase TSP (401K) contribution or invest outside?

Post by peseta » Sun Feb 24, 2019 5:27 pm

ExitStageLeft wrote:
Sun Feb 24, 2019 2:15 pm
For someone working 40+ years and getting the 10% premium at age 62, there's a good chance they will be in the same bracket just with pensions and SS. For someone retiring with 30 years at minimum retirement age, pension and SS alone are not enough to kick them up into the working tax bracket.
Interesting. Big driver of this is the employee's salary. If someone's a 15-10 or otherwise bumping up against the statutory cap ($164,200 for 2018), it seems like even a MFJ with a low-earning spouse would, at best, fall from a 24% bracket to a 22% bracket at retirement. With the uncertainty about future tax rates, this arguably militates in favor of Roth TSP for high-earning feds with significant anticipated federal service (25+ years).

peseta

Post Reply