Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

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Topic Author
theclumsymagician
Posts: 4
Joined: Sat Oct 17, 2020 8:02 pm

Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by theclumsymagician »

I'm a current fed employee with 10 years in and I plan to work another 25 years. I currently have a traditional TSP and I'm contributing 20% of my paycheck biweekly. I make $70,000 gross and within 4 to 8 months I expect to move up (self promotion) into higher grades, so I could be in the $80,000 to $90,000 range in the next 3 years.

In my case, should I only contribute 5% to my traditional TSP, so I can get the 5% agency match, and take the remaining 15% I was contributing to the traditional TSP and just max the Vanguard Roth IRA instead? In my TSP, I have roughly $110,000, so what I am thinking is that if I focus on the Vanguard Roth IRA instead (going to open it soon), I will have more money tax free when I retire. I will go on to put 5% contribution into my TSP so I can get the agency match, so it will be 10% total.

Thoughts on my plan?
khunron
Posts: 3
Joined: Tue Apr 18, 2017 6:29 pm

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by khunron »

The TSP offers a Roth, so why do you not want to max that out? Your max annual contribution for the TSP is $19,000, while an IRA is $6,000. Is there some reason behind your plan, like the investment options in the TSP vice Vanguard?

With the current withdrawal rules for the TSP I will be transferring my Roth portion when I retire, as I don't want/need to take RMD's against that amount. I will also be slowly transferring my traditional portion into an IRA so that I can take advantage of Qualified Charitable Distributions, which aren't available in a 401K. But for now I'm continuing to max it out every year, as I make too much to contribute to a Roth IRA.

You might get lower fees with some Vanguard options, but it might help if you mentioned that reason for wanting to change. I'm also curious what a "self promotion" is; never heard of that phrase used for civil service employees.
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wander
Posts: 3250
Joined: Sat Oct 04, 2008 9:10 am

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by wander »

khunron wrote: Sun Oct 18, 2020 6:55 am The TSP offers a Roth, so why do you not want to max that out? Your max annual contribution for the TSP is $19,000, while an IRA is $6,000. Is there some reason behind your plan, like the investment options in the TSP vice Vanguard?

With the current withdrawal rules for the TSP I will be transferring my Roth portion when I retire, as I don't want/need to take RMD's against that amount. I will also be slowly transferring my traditional portion into an IRA so that I can take advantage of Qualified Charitable Distributions, which aren't available in a 401K. But for now I'm continuing to max it out every year, as I make too much to contribute to a Roth IRA.

You might get lower fees with some Vanguard options, but it might help if you mentioned that reason for wanting to change. I'm also curious what a "self promotion" is; never heard of that phrase used for civil service employees.
Topic Author
theclumsymagician
Posts: 4
Joined: Sat Oct 17, 2020 8:02 pm

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by theclumsymagician »

khunron wrote: Sun Oct 18, 2020 6:55 am The TSP offers a Roth, so why do you not want to max that out? Your max annual contribution for the TSP is $19,000, while an IRA is $6,000. Is there some reason behind your plan, like the investment options in the TSP vice Vanguard?

With the current withdrawal rules for the TSP I will be transferring my Roth portion when I retire, as I don't want/need to take RMD's against that amount. I will also be slowly transferring my traditional portion into an IRA so that I can take advantage of Qualified Charitable Distributions, which aren't available in a 401K. But for now I'm continuing to max it out every year, as I make too much to contribute to a Roth IRA.

You might get lower fees with some Vanguard options, but it might help if you mentioned that reason for wanting to change. I'm also curious what a "self promotion" is; never heard of that phrase used for civil service employees.
I appreciate your response.

I would just prefer to have a separate account for roth instead of having it mixed with the traditional TSP, but you're right, I could do that. Guess I could do 10% traditional and 10% TSP Roth?

By self promotion, I mean that I am going to have to promote myself by leaving my office and if I have to, my current agency. My supervisors refuse to give me work to get to the next GS grade (they don't care about my development), so I will have to self promote by applying to other positions. I'm at GS-9, so looking for GS-11 positions, GS-11/12 ladder if I'm fortunate.
Fishing50
Posts: 443
Joined: Tue Sep 27, 2016 1:18 am

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by Fishing50 »

You have a great plan that maximizes the advantages of Roth IRA!

Not uncommon to list investing priorities as:
1. TSP to the match
2. Roth IRA contribution to the max
3. TSP to the max
4. taxable investing

Roth IRA is better than Roth TSP because contributions can be withdrawn for any reason. Contribution limitations make Roth IRA space extremely valuable, so you can put your emergency fund in a Roth IRA account. In future years, you can get that money invested once you have taxable savings. https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

If you are married filing jointly, Roth TSP is the right answer because you would be in the 12% tax bracket. As a single person, it's a toss up in the 22% tax bracket. I believe you can choose Roth TSP, and the agency matching contributions will still be traditional contributions. https://thefinancebuff.com/most-tsp-par ... h-tsp.html
2yrs from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash). | Gone Fishing At 52yrs old!
Rainmaker41
Posts: 563
Joined: Tue Apr 26, 2016 11:34 am

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by Rainmaker41 »

Another thing to bear in mind is that you want to have enough Traditional assets in retirement such that your withdrawals bring you into the same tax bracket at which you make the contributions.

For example, if you are paying 22% tax on Roth contributions, you want to be fairly sure you will have enough taxable income in retirement to use up the 10% and 12% brackets. This does not mean that Roth is bad; it adds tax diversification and flexibility in retirement taxable income, but it is desirable to also have enough traditional assets.

Note that your Federal pension will count as taxable income, so that helps with this also.
retiredjg
Posts: 41881
Joined: Thu Jan 10, 2008 12:56 pm

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by retiredjg »

With both a pension and SS in retirement, coupled with a desire to work another 25 years, what you do not want to do (in my opinion) is put a great deal of money into traditional TSP.

I would fill the Roth IRA, put some in traditional TSP and some in Roth TPS. The match will go to traditional.

https://thefinancebuff.com/most-tsp-par ... h-tsp.html

It is not really possible to evaluate your plan without knowing your marital status and current tax bracket.
rkhusky
Posts: 10179
Joined: Thu Aug 18, 2011 8:09 pm

Re: Max out Vanguard Roth IRA and contribute 5% to Traditional TSP? Thoughts on my plan?

Post by rkhusky »

Roth and Traditional are the same if the tax rate to contribute to Roth now is the same as the tax rate to withdraw from Traditional in retirement, assuming you invest your Traditional tax savings.

Just be aware that your paycheck will be less if you switch to Roth.

Also, if you retire early, there may be a number of years to do Roth conversions at a lower rate than you would pay now to do Roth.

Best solution is to max Traditional TSP and Roth IRA, although Roth TSP would be good in the 12% bracket.
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