Roth TSP or Traditional TSP

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Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Roth TSP or Traditional TSP

Post by Tatupu »

Hello all,

I'd like to get your thoughts on whether you would contribute to the Roth TSP or traditional TSP in my circumstances.

We are dual federal employees and with catch-up contributions can contribute a total of $45,500 into our TSP accounts in 2020. Until now we have been contributing entirely to the traditional TSP. The majority of our retirement savings is in our TSP accounts though we do both have Roth IRAs and some taxable.

Our income in 2020 will put us in either the 22% or 24% bracket.

To have more flexibility in terms of tapping money while in retirement, I am thinking we will want to convert traditional TSP money into Roth money before RMDs hit. I project that we will have about 8 years after retirement and before RMDs where our only income would be a pension, likely putting us in a lower tax bracket. I guess that would be the ideal time to convert some of that traditional TSP money into a Roth.

While I understand it's impossible to predict future tax brackets, your thoughts on what you would do in my situation would be much appreciated.

Keep throwing money into the regular TSP or into the Roth TSP?

Thanks!
AznSaver
Posts: 123
Joined: Sun Aug 25, 2019 5:51 pm
Location: Seattle, WA

Re: Roth TSP or Traditional TSP

Post by AznSaver »

Good evening,

As far as I am aware of there isn't a way to convert traditional TSP contributions into the Roth Tsp.
You can of course after separation do a withdrawal from the TSP transfer the funds to an IRA and then covert into a Roth.

I would recommend a system of using both which I do myself, depending on your tax situation.
I contribute an amount that keeps me from entering the next higher tax bracket and then put the rest that I can afford into the Roth TSP.
For me this comes out to 8% TSP /2% Roth TSP, I also utilize my IRA's in a similar manner.
i.e contribute the total amount required to keep yourselves in the lowest achievable tax bracket and trickle the rest into the Roth.

If you planned on doing Roth conversions after separation regardless there is a good argument for doing all tax-deductible contributions to minimize the amount paid in taxes and wait to do Roth conversions until separation when you could be in a lower bracket. The ability to be in the same or lower tax bracket in retirement might be impeded by a pension and the inability to reduce taxable income.

Side Note: Any agency match given on your contributions are only put into the tradition portion of your TSP.
fujiters
Posts: 415
Joined: Tue Mar 06, 2018 2:17 pm

Re: Roth TSP or Traditional TSP

Post by fujiters »

How much do you already have saved in tax deferred? How much are your pensions estimated to be (it sounds like you'll both draw at 62)? How much SS and other income will you have and starting at what ages?

I recommend generating some estimated tax returns based on these assumptions so you can see how much room you have in your retirement tax bracket(s). https://www.i-orp.com/ is also useful for determining how much you should end up converting based on each assumption. You want to contribute to Roth if you will be forced into withdrawing at a higher tax bracket than you are in now (which may be the case depending on how much you already have in tax deferred).
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham
tigermilk
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Joined: Thu Aug 15, 2013 9:32 am

Re: Roth TSP or Traditional TSP

Post by tigermilk »

I faced the same question this year. Lots of things happened, such as turning 50 enabling catch ups and also reaching the 2 comma club in my TSP. A couple of months ago I decided to go all in on Roth TSP as a hedge against future tax rates. I will pay the 22% rate now for my contributions going forward until retirement (financially could be done now, but will wait until the year of my MRA).

My plan once I retire is to pay myself handsomely until age 70 and moreso after that with significant tax free or low tax (long term capital gains rate). Ideally the traditional TSP balance will be zero the year RMDs start, as I intend to delay SS to 70 maximize that benefit. The somewhat big assumption is if the SS supplement will still be around, even though it isn't a big amount. Regardless, it will be -13 years of TSP withdrawals and regular dumps into our Roth IRAs and taxable. We will be in the same tax bracket in retirement, and without kids, if we want to spend down to nothing, I had to start the Roth TSP to avoid creeping into higher brackets based on my projections. Finally, we have the money to pay the taxes now, even with fully funding to the max plus catch up, fully funding the HSA, maxing the Roths and their $1k catch ups, and even putting at least $1k/month into taxable. I will gladly take the discounted tax rate now and hedge my bets on future rates.
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Watty
Posts: 21368
Joined: Wed Oct 10, 2007 3:55 pm

Re: Roth TSP or Traditional TSP

Post by Watty »

Tatupu wrote: Fri Dec 06, 2019 12:29 am .....your thoughts on what you would do in my situation would be much appreciated.
My situation was a lot different but once I financially got to the point where I could I retire then I retired a bit early when I was 58 and that kept be from being in the next higher retirement tax bracket.

By then my house was paid off and my kid was out on his own so my retirement income needs are fairly moderate compared to when I was working and my only big expense is travel and I expect that to go down by the time I am in my mid 70s or older when I will likely want to travel less.

Unless you really love your jobs then you should take a hard look to see if you could retire a bit early.

One thing that you did not mention was how much money you have in taxable accounts. Once you retire if you have enough in taxable accounts to live on for a while then you may be able to do Roth conversions in the 12% federal tax bracket so you might want to plan to see if you can do for that. If you did not have any other taxable income then a couple could do around $100K in Roth conversion in the 12% federal tax bracket.
stan1
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Re: Roth TSP or Traditional TSP

Post by stan1 »

I would switch to Roth TSP contributions. 22% or 24% marginal rate isn't a major difference. Especially if you would also be saving in taxable accounts in these coming years. You might never be in a lower tax bracket than 22% given the two pensions. Sounds like you do not have state income taxes.

Also, if your pensions will more than cover your retirement expenses I'd consider whether one or both of you want to retire at MRA before 62.
Tdubs
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Re: Roth TSP or Traditional TSP

Post by Tdubs »

Since it sounds like you are heavy in traditional, adding Roth TSP (or better Roth IRA) makes sense. We may not be able to predict what will happen with tax rates, but it seems very unlikely they will get better than now.

One question, do you plan on retiring in your current state of residence? Any chance you might retire to a low-tax state?
Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Re: Roth TSP or Traditional TSP

Post by Tatupu »

stan1 wrote: Fri Dec 06, 2019 7:44 am I would switch to Roth TSP contributions. 22% or 24% marginal rate isn't a major difference. Especially if you would also be saving in taxable accounts in these coming years. You might never be in a lower tax bracket than 22% given the two pensions. Sounds like you do not have state income taxes.

Also, if your pensions will more than cover your retirement expenses I'd consider whether one or both of you want to retire at MRA before 62.
Thanks. Correct, my state has no income tax. I plan to stay in same state upon retirement.

It seems likely to me that we’ll be in a lower tax bracket at retirement. My spouse’s federal service is sporadic and sometimes part-time, so that pension would be quite small.

We are maxing the TSPs, Roth IRAs, HSA, and save some in taxable annually.
Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Re: Roth TSP or Traditional TSP

Post by Tatupu »

Tdubs wrote: Fri Dec 06, 2019 8:00 am Since it sounds like you are heavy in traditional, adding Roth TSP (or better Roth IRA) makes sense. We may not be able to predict what will happen with tax rates, but it seems very unlikely they will get better than now.

One question, do you plan on retiring in your current state of residence? Any chance you might retire to a low-tax state?
Thanks. Yes, I plan to stay in my current state of residence upon retirement. There is no state income tax.
rkhusky
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Re: Roth TSP or Traditional TSP

Post by rkhusky »

Make sure that you take into account the taxation of Social Security: https://www.bogleheads.org/wiki/Taxatio ... y_benefits. It can do funny things to your marginal tax rate and effective tax rate on RMD's. The latter is what you want to compute under different scenarios (contributing to Roth TSP now and/or doing Roth conversions up to the top of the 12%/15% or 22%/25% tax bracket in retirement) and compare to your marginal tax rate now. (If your pensions > SS/2 + 36 (MFJ), e.g. SS=$40K, Pension>$56K, then you don't have to worry about the odd behavior of SS taxation, since your RMD's will be completely out of the SS hump.)

Plan for the potential of the 22% tax bracket changing back to 25% in 5 or 6 years, as the law is currently written.
Last edited by rkhusky on Fri Dec 06, 2019 4:39 pm, edited 3 times in total.
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FiveK
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Re: Roth TSP or Traditional TSP

Post by FiveK »

Tatupu wrote: Fri Dec 06, 2019 12:29 am While I understand it's impossible to predict future tax brackets, your thoughts on what you would do in my situation would be much appreciated.
I'd try estimating our marginal tax rate in retirement. In addition to being speculative due to unknown future tax law, it is also highly personal because it depends on your (voluntary or involuntary) retirement date, amount already in traditional plans, etc. But without doing said estimate you might as well flip a coin.

Because your choice for this year does not obligate you to make the same choice in subsequent years, you can (and probably should) revisit the choice ~annually, taking any changes in generic and specific items into consideration.
ExitStageLeft
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Re: Roth TSP or Traditional TSP

Post by ExitStageLeft »

It's a good bet that with two pensions, 85% of your SS benefits will count as gross income. If your combined FERS is $50k and your combined SS is $50k, then under current tax law for MFJ your AGI would be $92.5k and your taxable income would be at most $68.1k. That's in the 12% bracket.

If you add an RMD on top of that, your taxable income jumps by that amount. It only takes a tax-deferred balance of around $300k for the additional income from the RMD to bump you up to the 22% bracket. Or combined FERS annuity of $63k and SS of $50k. Then it won't matter what your RMD is, you'll be in the 22% bracket. In 2026 that is due to become the 25% bracket, so I think you should be looking to save in Roth anything you can at 22% or below.

So that means saving in traditional TSP enough to lower your AGI so that you don't bump into the 24% bracket. Put the rest into Roth TSP.

When the first of you approaches age 63, give some thought to whether you will be taking Medicare part B and if so, be aware of the IRMAA premium tiers for higher earners. That may argue for dialing back on Roth savings at that point.
MarvinK
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Location: DC

Re: Roth TSP or Traditional TSP

Post by MarvinK »

Just a reminder to begin your Roth TSP balance as early as possible and seek tax advice. For example: There is still a 5 year minimum to be considered a qualified withdrawal.


From a Fedweek article "With the Roth portion of your TSP account you have contributed out of already taxed dollars, so you will not have to pay tax on the portion of your Roth withdrawals that are attributable to your contributions. In addition, if your Roth withdrawals are considered to be qualified, you will not have to pay tax on the earnings either; resulting in no tax at all on Roth withdrawals.

Two tests must be met for a Roth withdrawal to be considered qualified. First, you must have had the Roth balance in your TSP for at least five years. You will meet the five-year requirement on January 1 of the year that is five years from the year that you opened your Roth balance. Second, you must be at least 59 ½ years of age."
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