Roth TSP vs Traditional TSP

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Topic Author
Atwater28
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Joined: Tue Jun 08, 2021 3:24 pm

Roth TSP vs Traditional TSP

Post by Atwater28 »

Hello boggleheads, I inherited a Traditional IRA account $500,000. I want to reinvest it all over a 10 year period. I want to first max out my retirement TSP, then Roth IRA and rest into taxable account.

For my TSP account (retirement plan for federal workers) would I be better off investing the max amount (coming from traditional Ira which is taxed when taken out) into ROTH TSP or Traditional TSP? Not sure if this will make a difference I live in California and plan to stay here, also currently $900,000 in taxable account.
Last edited by Atwater28 on Tue Oct 12, 2021 11:24 am, edited 1 time in total.
Soon2BXProgrammer
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Re: Roth TSP vs Traditional TSP

Post by Soon2BXProgrammer »

Atwater28 wrote: Tue Oct 12, 2021 11:20 am Hello boggleheads, I inherited a Traditional IRA account $500,000. I want to reinvest it all over a 10 year period. I want to first max out my retirement TSP, then Roth IRA and rest into taxable account.

For my TSP account (retirement plan for federal workers) would I be better off investing the max amount (coming from traditional Ira which is taxed when taken out) into ROTH TSP or Traditional TSP? Thank you
i would guess because you have roughly an extra 50k a year of income, you would probably want to do traditional TSP to level off/ reduce your tax burden... this is unless you expect your income to grow significantly in the future...

Assuming the TSP ends up adding Roth conversions, which they are talking about doing after the record keeper transition next summer... then you could do Roth conversions once you run out of the inherited account distributions if you think your marginal tax rate then is low enough to warrant conversions.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
pizzy
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Re: Roth TSP vs Traditional TSP

Post by pizzy »

Are you asking if you can/should rollover your inherited IRA into your TSP?

Or if you should max out your TSP using payroll contributions and then withdraw from the inherited IRA to cover any living expenses shortfall?
MrJedi
Posts: 1198
Joined: Wed May 06, 2020 11:42 am

Re: Roth TSP vs Traditional TSP

Post by MrJedi »

A full portfolio and retirement plans is needed to try and tackle the Roth vs traditional question.

I will say that a large inherited traditional IRA likely means your income and taxes will be higher than normal as you distribute from it. This would be a point toward traditional contributions.
Topic Author
Atwater28
Posts: 13
Joined: Tue Jun 08, 2021 3:24 pm

Re: Roth TSP vs Traditional TSP

Post by Atwater28 »

pizzy wrote: Tue Oct 12, 2021 11:25 am Are you asking if you can/should rollover your inherited IRA into your TSP?

Or if you should max out your TSP using payroll contributions and then withdraw from the inherited IRA to cover any living expenses shortfall?
I am going to max out TSP using payroll contributions and then withdraw from I inherited IRA to cover living expenses shortfall.
mhalley
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Re: Roth TSP vs Traditional TSP

Post by mhalley »

The decision of Roth vs traditional is based on multiple factors. The main one is tax bracket now vs tax bracket in the future. Years till retirement also plays a roll, as does estate planning, as well as salary projection going forward. We are not allowed to discuss it here, but future tax laws could change, making current recommendations obsolete. Tax diversification by going 50/50 is one way to go.
https://www.nerdwallet.com/article/investing/roth-401k
https://www.forbes.com/sites/kristinmck ... 46a28e34a3
joverby
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Re: Roth TSP vs Traditional TSP

Post by joverby »

One consideration is that with the Roth TSP you can get more of your money into a tax deferred account because every dollar in there is yours. With the traditional TSP some portion (likely 22% to 35% +) is deferred taxes. You already have a healthy taxable account balance, so I’d be trying to get more in tax deferred.

How much do you already have in your traditional TSP? What is your expected traditional TSP balance at 70.5? If you think you may have 2+ mil then those RMDs (along with SS and your pension) will force you into a high tax bracket. If your traditional TSP balance is high, that’s another reason you might want to favor the Roth TSP.

Remember that Roth IRAs have income limits (125k single, 198k married). You may need to use a back door if over the thresholds.
retiredjg
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Re: Roth TSP vs Traditional TSP

Post by retiredjg »

People with a pension need less in tax-deferred accounts than people without a pension. I'd be using a fair amount of Roth TSP (but probably not 100%).

With so little information, it is difficult to say much more.
aristotelian
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Re: Roth TSP vs Traditional TSP

Post by aristotelian »

What is your tax bracket? The higher your tax bracket, the greater the potential benefit of traditional.

Is your inherited IRA subject to RMD's or the new 10 year rule?

Not sure what you mean by "coming from Traditional IRA". The only way to contribute to employer plans is through your paycheck. You can live off your IRA distributions while contributing your paycheck to TSP if that is what you mean.

As other said, you need to provide more details if you want advice for what sounds like a unique situation.
Soon2BXProgrammer
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Re: Roth TSP vs Traditional TSP

Post by Soon2BXProgrammer »

retiredjg wrote: Tue Oct 12, 2021 11:52 am People with a pension need less in tax-deferred accounts than people without a pension. I'd be using a fair amount of Roth TSP (but probably not 100%).

With so little information, it is difficult to say much more.
I 100% agree with you, but the op has an extra 50k/year of income for 10 years, assuming holding all else equal, traditional for those years probably statistically makes sense.. (and potentially followed by roth conversions)

However, you are correct, without lots more detail its hard to know.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Roth TSP vs Traditional TSP

Post by retiredjg »

Atwater28, that "more detail" people are talking about is described in the link at the bottom of this message. It is some work but you will learn a lot by doing that work.

At this point, the actual investments do not matter, but the size of the accounts does matter. If you want to ask about how to invest, do include how you are invested currently.
Topic Author
Atwater28
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Joined: Tue Jun 08, 2021 3:24 pm

Re: Roth TSP vs Traditional TSP

Post by Atwater28 »

Emergency funds: currently have 6 months of emergency funds

Debt: Debt free, home and car is paid off

Tax Filing Status: currently filing single but plan to get married next year. Future wife makes approx. $50,000 year.

Tax Rate:24%Federal, 9.3 State California. Current income anywhere from $65,000 to $105,000.

Age:40 years old

Currently have

Approximately $200,000 into TSP 50% large cap stocks, 30% international and 20% Bonds. $150,000 is in traditional TSP and $50,000 into ROTH TSP

$55,000 in ROTH Vanguard Total World Stocks

$900,000 taxable Vanguard with 50% total stock market and 50% total international stock market.

Have $500,000 in inherited IRA which will reinvest over the next 10 years. Want to use the money in the inherited IRA and reinvest it all by maxing out TSP (federal workers retirement investing), max out Roth IRA, invest rest in taxable. Am I better off investing into Roth TSP, Traditional TSP or a combination of both. Thank you everyone for taking time out of your day to help me make the best decision.
delamer
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Re: Roth TSP vs Traditional TSP

Post by delamer »

mhalley wrote: Tue Oct 12, 2021 11:30 am The decision of Roth vs traditional is based on multiple factors. The main one is tax bracket now vs tax bracket in the future. Years till retirement also plays a roll, as does estate planning, as well as salary projection going forward. We are not allowed to discuss it here, but future tax laws could change, making current recommendations obsolete. Tax diversification by going 50/50 is one way to go.
https://www.nerdwallet.com/article/investing/roth-401k
https://www.forbes.com/sites/kristinmck ... 46a28e34a3
Good advice.

It’s not an either/or situation. Having some balance between types of accounts is ideal.

Once you marry, you should integrate your planning/savings with your wife’s.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
aristotelian
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Re: Roth TSP vs Traditional TSP

Post by aristotelian »

Atwater28 wrote: Tue Oct 12, 2021 12:54 pm Emergency funds: currently have 6 months of emergency funds

Debt: Debt free, home and car is paid off

Tax Filing Status: currently filing single but plan to get married next year. Future wife makes approx. $50,000 year.

Tax Rate:24%Federal, 9.3 State California. Current income anywhere from $65,000 to $105,000.

Age:40 years old

Currently have

Approximately $200,000 into TSP 50% large cap stocks, 30% international and 20% Bonds. $150,000 is in traditional TSP and $50,000 into ROTH TSP

$55,000 in ROTH Vanguard Total World Stocks

$900,000 taxable Vanguard with 50% total stock market and 50% total international stock market.

Have $500,000 in inherited IRA which will reinvest over the next 10 years. Want to use the money in the inherited IRA and reinvest it all by maxing out TSP (federal workers retirement investing), max out Roth IRA, invest rest in taxable. Am I better off investing into Roth TSP, Traditional TSP or a combination of both. Thank you everyone for taking time out of your day to help me make the best decision.
Thanks for the additional detail. Unless you have a pension you haven't mentioned, yes, you should max your TSP and I would go with the traditional TSP since you are in a high tax bracket. Also remember that distributions from your Inherited IRA are taxable, pushing up your AGI even further.

Again, you should get out of your head that you are "reinvesting" the IRA in your 401k since you cannot directly transfer or roll over an inherited IRA into an active 401k in your name. You can contribute from your paycheck into the 401k and then use the IRA for your living expenses while investing any difference left over in a taxable brokerage account.
retiredjg
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Re: Roth TSP vs Traditional TSP

Post by retiredjg »

Atwater28 wrote: Tue Oct 12, 2021 12:54 pm Have $500,000 in inherited IRA which will reinvest over the next 10 years. Want to use the money in the inherited IRA and reinvest it all by maxing out TSP (federal workers retirement investing), max out Roth IRA, invest rest in taxable. Am I better off investing into Roth TSP, Traditional TSP or a combination of both. Thank you everyone for taking time out of your day to help me make the best decision.
I suggest a combination. However, there is no way to know what will work out "better" because things change. You can only make an educated guess based on what you know and expect now.

You currently have $150k in tax-deferral and $105k in Roth IRA and $900k in taxable plus the inherited IRA. When retirement comes, that will be a very nice ratio. What you want to avoid is having so much in tax-deferral that it becomes a burden in your 70's when you have your pension, SS, and RMDs from the tax-deferred account all coming at you at the same time. It can actually push you into a higher tax bracket. :shock:

In short, you do want some money in tax-deferral, but not too much money in tax-deferral. Unfortunately, the dividing line there is not clear for anyone until many years after the decision/guess is made.

I'd shoot for a long term goal of half traditional (this includes the match) and half Roth (includes Roth IRA). In your current higher tax bracket, use more traditional. When you marry and probably drop a tax bracket, use more Roth.

If you know for sure you will leave high tax California and move to no tax Nevada, maybe use more traditional now to lower state taxes?

If you know for near sure you will retire in your 50's instead of 66, you can use more traditional because there will be more time to convert those tax-deferred accounts to Roth before RMDs start.

As you can see, it is all a balancing act.
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FiveK
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Re: Roth TSP vs Traditional TSP

Post by FiveK »

Atwater28 wrote: Tue Oct 12, 2021 12:54 pm Tax Filing Status: currently filing single but plan to get married next year. Future wife makes approx. $50,000 year.
Tax Rate:24%Federal, 9.3 State California. Current income anywhere from $65,000 to $105,000.
Age:40 years old
$150,000 is in traditional TSP
$900,000 taxable
How good is your crystal ball?

E.g., assuming
- 5% real return for 20 years
- adding $350K of that $500K to your "taxable" balance now
at age 60 (when you might want/have to retire?) you would have $400K in traditional funds and $3.3 million in taxable. At that point you could withdraw just under $40K/yr from the traditional account and your marginal tax rate (federal + CA combined) using 2021 brackets would still be <20%.

Under those assumptions putting your money into traditional now, saving >30% on federal + CA combined, is reasonable.

Other assumptions could lead to different conclusions, which takes us back to the crystal ball....
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