Have a regular TSP, should I consider a Roth TSP?

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LuigiLikesPizza
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Have a regular TSP, should I consider a Roth TSP?

Post by LuigiLikesPizza » Tue Nov 12, 2019 8:26 am

I am preparing to retire in 2020. I have a regular TSP account.

Would it be of any benefit to me to establish a Roth TSP?

Thank you.

rkhusky
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by rkhusky » Tue Nov 12, 2019 9:01 am

LuigiLikesPizza wrote:
Tue Nov 12, 2019 8:26 am
Would it be of any benefit to me to establish a Roth TSP?
Not unless you plan to contribute a significant amount. The TSP does not allow Roth conversions - you have to transfer funds to an IRA to do that. And you can't roll Roth IRA money into the TSP.

In fact, if your annual leave payout and/or VSIP bump you up into a higher bracket than you expect in retirement, it might be worse to contribute to the Roth TSP.

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grabiner
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by grabiner » Tue Nov 12, 2019 10:23 pm

The Roth TSP is better than the regular TSP if you will retire in a higher tax bracket than your current bracket (so that you lose a smaller percentage to taxes), or in a nearly equal bracket and can max out the Roth TSP (so that you lose the same percentage of the TSP to taxes, but have less in a taxable account that is worse than either TSP). Unless you expect to be in a low tax bracket because of only working part of the year in 2020, or you currently work in a no-tax state but will retire in a high-tax state, the Roth TSP is not likely to be good at the very end of your career when your salary is highest.
Wiki David Grabiner

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Watty
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by Watty » Tue Nov 12, 2019 11:32 pm

There is a wiki on this choice if you have not seen it.

https://www.bogleheads.org/wiki/Traditional_versus_Roth

I would suggest doing some dummy tax returns using tax software or using a website like this to see what your future taxes may be like. Also factor in your likely state taxes.

https://www.olt.com/main/home/taxestimator.asp

When people post about retiring with a TSP I often mention some issues with the TSP inhertence rules. Here is what I have posted before.
Be sure that you understand that the TSP inheritance laws are different than IRA inheritance laws and they are sometimes worse. There is a wiki on this;

https://www.bogleheads.org/wiki/TSP_estate_planning

There was a post awhile back where where someone had run into this situation;

1) Dad had a large TSP, he died and left it to his wife.
2) Wife left the money in the TSP as a beneficiary participant, that worked OK for her.
3) A few years later the wife died and left the TSP to their kid. 

The problem was because of the TSP inheritance rules that the kid could not roll the money out to an inherited IRA and they could also not leave the money in the beneficiary participant account so the kid had to withdraw the money and pay taxes on it. If either the Mom or Dad had rolled the money into an IRA then the kid could have avoided, or at least delayed, a six figure tax bill since they could have the money in an inherited IRA.

You might want to consider rolling the money out to an IRA.

When I have posted about this before there have occasionally been comments to the effect of "I will leave a note for my wife to roll the money out to an IRA if I die first." I would not want to count on an 80 year old recently widowed person actually doing that.

AznSaver
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by AznSaver » Wed Nov 13, 2019 12:16 am

IMHO, It might be too little too late to start a Roth TSP if you plan to retire in 2020.

The total amount you can contribute to the plan would be $19500 + $6500 (If eligible for catch-up contributions.)
How much of your contribution limit space do you have available, any amount put in your traditional plus the employer match takes away from the space available for the Roth as it is a combined limit ($26000-Traditional contributions)? Side note: matching funds cannot be placed in Roth.

As contributions are typically through payroll with the time remaining how much could you realistically add to a ROTH TSP?
How valuable is that amount growing tax free versus that same amount+tax savings growing with taxation differed?

If your timeline wasn't so short, <1 year, I would say to go for it if it didn't adversely effect you for taxes (i.e. if removing traditional space for Roth doesn't place some of your income in a higher tax bracket)

billfromct
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by billfromct » Wed Nov 13, 2019 7:29 am

You don't mention if you have a Roth IRA or are married, but if you don't have a Roth IRA & fall under the modified adjusted gross income (MAGI) guidelines (I think about $122k for a single person for 2019), you may want to do so; also for your spouse if married.

Roth retirement accounts are best started when young & in a lower tax bracket so you have many years for that Roth retirement account to compound tax free & be able to take out state & Federal tax free after age 59.5.

I have been contributing to my Roth IRA since 1998 when they were established. My employer offered a Roth 401k around 2006 or so. Since this was later in my career (potentially 8-10 years before retirement at the time) & I was in a higher tax bracket, it didn't make sense to go with a Roth 401k.

I wish Roth retirement accounts were available when I was starting out in the work force.

bill

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LuigiLikesPizza
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by LuigiLikesPizza » Fri Nov 15, 2019 9:17 am

<<<Unless you expect to be in a low tax bracket because of only working part of the year in 2020, or you currently work in a no-tax state but will retire in a high-tax state, the Roth TSP is not likely to be good at the very end of your career when your salary is highest.>>>


I will be in a low tax bracket in 2020. I plan to only work through the end of the first quarter.

I currently live in a low tax state and will be likely be moving to higher tax state.

The still hazy plan was to continue contributions to the regular TSP through 12/31/2019 and then begin a Roth TSP for 2020 - but if I cannot roll over into, that point may be moot.

Thanks all.

rkhusky
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by rkhusky » Fri Nov 15, 2019 11:04 am

If you plan to do Roth conversions in 2020, contributing to a Roth TSP would be an alternative. And you can now transfer just the Roth TSP portion to a Roth IRA, leaving the Traditional TSP.

anon_investor
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Re: Have a regular TSP, should I consider a Roth TSP?

Post by anon_investor » Fri Nov 15, 2019 11:12 am

rkhusky wrote:
Fri Nov 15, 2019 11:04 am
If you plan to do Roth conversions in 2020, contributing to a Roth TSP would be an alternative. And you can now transfer just the Roth TSP portion to a Roth IRA, leaving the Traditional TSP.
+1.

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