invest in the traditional TSP or the ROTH TSP?

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Topic Author
KATNYC
Posts: 490
Joined: Fri Apr 07, 2017 4:34 pm

invest in the traditional TSP or the ROTH TSP?

Post by KATNYC »

Saving and investing is much easier than figuring out the logistics of retirement buckets of money to pull from at age 67 or sooner.
We now have access to TSP (new job) which also includes a pension.
We are leaning toward the traditional TSP instead of the ROTH TSP and started contributing 5% to the traditional to get the match.
They only match 5% of base salary, not 5% of total pay with overtime. Matching funds go into the traditional TSP so even if we go with 100% ROTH TSP, there would still be a traditional TSP account filled only with matching funds.

About us:
Ages: 35, 31
Tax Filing Status: Married Filing Jointly
No kids
State of Residence: NY (NYC)
Tax Rate: 22% Federal
NYS tax rate: 6.33%
NYC tax rate: 3.876%


Assets:
$52,500 cash - emergency fund (in 3% accounts up to $50K, excess pays 1%)
NYC apartment $700,000 appraisal
Paid off SUV
Hers: $392,195 in 401K with 6% company match (401k loans available up to 50% of balance; no mega ROTH options) max out annually
Hers: $17,434 Vanguard ROTH max out annually
His: $20,852 Vanguard ROTH max out annually
His: $2,372 TSP traditional
HSA: $22,431 max out annually

Debt:
$28,007 in student loan debt 3.71% fixed
$170,628 10/1 ARM mortgage 3.375%

Annual expenses are about $72K
Expenses at retirement are projected at about $52,500 (no mortgage or student loans)

Not sure if we should invest in the traditional TSP or the ROTH TSP. Leaning toward the traditional since we already max out two ROTH IRAs and since we are avoiding 32%+ in taxes on those funds by going with the traditional TSP.
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FiveK
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Re: invest in the traditional TSP or the ROTH TSP?

Post by FiveK »

KATNYC wrote: Sun Jan 19, 2020 1:56 pm Not sure if we should invest in the traditional TSP or the ROTH TSP. Leaning toward the traditional since we already max out two ROTH IRAs and since we are avoiding 32%+ in taxes on those funds by going with the traditional TSP.
Take a look at Traditional versus Roth - Bogleheads. It's all about marginal tax rate now vs. when withdrawing. How does that look to you?
02nz
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Joined: Wed Feb 21, 2018 3:17 pm

Re: invest in the traditional TSP or the ROTH TSP?

Post by 02nz »

I think I'd go with traditional in your situation. Your pension won't be massive as you're starting a bit later than some and it's FERS, so on its own it's not going to put you anywhere near the 22% federal bracket when you retire. And you could retire in a locale with lower taxes than New York or no income tax at all, which is another argument for traditional.

After putting in the 5% to get the government's match, I'd max the Roth IRAs (as you're already doing) before putting more into TSP. The HSA/HDHP is also a smart choice.
stan1
Posts: 9185
Joined: Mon Oct 08, 2007 4:35 pm

Re: invest in the traditional TSP or the ROTH TSP?

Post by stan1 »

With the student loan, mortgage, tax rates, and no taxable investing account contributions I'd do Traditional contributions.

Also, if you plan to stay in NYS, FERS pensions and retirement account withdrawals have a $20K/year exemption from state taxes. That also favors Traditional contributions now.
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Watty
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Re: invest in the traditional TSP or the ROTH TSP?

Post by Watty »

KATNYC wrote: Sun Jan 19, 2020 1:56 pm Tax Rate: 22% Federal
NYS tax rate: 6.33%
NYC tax rate: 3.876%
Under the current tax laws the next higher federal tax bracket is only 2% higher at 24% and a couple would need to have around $350K in taxable income to get above the 24% federal tax bracket.

https://obliviousinvestor.com/2020-tax-brackets/

Tax brackets are scheduled to revert back to the old rates in 2026 but even if that happens or there are other future rate increases there is not a lot of likely upside by paying taxes 40+ years before you will need the money.

Using the traditional account looks like an easy choice to me.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: invest in the traditional TSP or the ROTH TSP?

Post by lakpr »

One more vote to go Traditional TSP now. At the very least, it avoids the New York state taxes, which are a sizable chunk (almost 10% if you take city taxes into account). You can at least theoretically shift to a lower tax-rate or no-income-tax state in retirement.
Topic Author
KATNYC
Posts: 490
Joined: Fri Apr 07, 2017 4:34 pm

Re: invest in the traditional TSP or the ROTH TSP?

Post by KATNYC »

Glad to know that we are on the right track with the traditional TSP.
We learned about the $20K/year exemption from NY state taxes only this week when talking to my dad about social security and paying taxes on that income (he is 70 but not drawing SS).
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teen persuasion
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Re: invest in the traditional TSP or the ROTH TSP?

Post by teen persuasion »

KATNYC wrote: Mon Jan 20, 2020 8:25 am Glad to know that we are on the right track with the traditional TSP.
We learned about the $20K/year exemption from NY state taxes only this week when talking to my dad about social security and paying taxes on that income (he is 70 but not drawing SS).
That $20k state exemption is for each of you. So he gets $20k exemption per year, and she gets $20k exemption per year. However, it's not combineable - if only one of you has taxable retirement income, you don't get $40k exemption on one person's account withdrawals. So shoot for balance between you.

It's an issue for us - until this year, only my DH had access to a 401k, and we do both IRAs Roth, so all trad is in his name. At retirement, we'd only have $20k exemption if everything remains on his side. I've just gotten a SIMPLE IRA, so we're shifting contributions to my side, but at this stage of the game we'll never even it out.
Topic Author
KATNYC
Posts: 490
Joined: Fri Apr 07, 2017 4:34 pm

Re: invest in the traditional TSP or the ROTH TSP?

Post by KATNYC »

teen persuasion wrote: Mon Jan 20, 2020 10:17 am
KATNYC wrote: Mon Jan 20, 2020 8:25 am Glad to know that we are on the right track with the traditional TSP.
We learned about the $20K/year exemption from NY state taxes only this week when talking to my dad about social security and paying taxes on that income (he is 70 but not drawing SS).
That $20k state exemption is for each of you. So he gets $20k exemption per year, and she gets $20k exemption per year. However, it's not combineable - if only one of you has taxable retirement income, you don't get $40k exemption on one person's account withdrawals. So shoot for balance between you.

It's an issue for us - until this year, only my DH had access to a 401k, and we do both IRAs Roth, so all trad is in his name. At retirement, we'd only have $20k exemption if everything remains on his side. I've just gotten a SIMPLE IRA, so we're shifting contributions to my side, but at this stage of the game we'll never even it out.
Same. We won't ever even it out at this stage. It's almost like another marriage penalty.
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