TSP - how to allocate funding between ROTH TSP and Traditional TSP

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VACat07
Posts: 10
Joined: Mon Feb 11, 2019 4:56 pm

TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by VACat07 » Mon Feb 11, 2019 6:00 pm

Hi, I'm new to this forum but have been lurking the past few months. Here is our info, and I'll ask my questions below:

Emergency funds: $10K
Debt: Mortgage $315K at 2.9% (paid off before retirement); Student Loan $13K at 1.9% (paid off in 2 years)
VA529 - $8500
Tax Filing Status: Married Filing Jointly
Tax Rate: 12.2% (effective - 22% bracket) Federal, 5.6% State
State of Residence: VA
Age: W-50, H-48

Current retirement assets

Taxable
$490K - investments at Schwab (stocks, ETFs and mutual funds)

H Pension (at 60)- $61K per year (this includes the 10% decrease to add in survivor benefits)

H 401K equivalent
$255K - Traditional TSP
$45K - ROTH TSP

H Roth IRA at Schwab
$65K

H Inherited IRA at Schwab
$320K (RMD this year - approx. $8400 and already taken out this year)

W ROTH IRA at Schwab
$120K

W Rollover IRA at Schwab
$275K

New annual Contributions
$7,500 H Traditional TSP (5% government match)
$7,500 H ROTH TSP (5% government match)
$6,000 H Roth IRA (already funded this year)
$7,000 W Roth IRA (already funded this year)

Question: I had been under the assumption that we should start switching most funding to ROTH IRAs (although we've only done 1/2 and 1/2 for the TSP for the last few years). After reading here, I'm not sure if we should move away from the ROTH TSP and just fully fund the traditional TSP. And yes, I know we have not been fully funding the TSP. My husband recently got promoted, so we now have the money to fully fund to $19k. And then keep funding the outside ROTH IRAs. I don't know what our tax rate will be in retirement. We will probably move to a no income tax state. However, with pension, RMDs on the inherited IRA and regular IRAs and SS, I'm thinking we might be higher than or current tax rate. I need to know how to divy up the $19k TSP funding going forward - all traditional TSP, 50/50 split, some other type of split?

Thank you.

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MillennialFinance19
Posts: 151
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Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by MillennialFinance19 » Mon Feb 11, 2019 7:56 pm

Considering you just stated that your tax rate could be higher in retirement, I’d put as much into the Roth TSP as you can stomach. Withdrawing this tax free in retirement will be a wonderful thing. At least this is the perspective I use to determine my TSP\Roth TSP split, as I believe my tax rate will be higher also due to multiple pensions.

Also to be noted - I believe that TSP forces you to withdraw TSP/ROTH TSP funds at equal rates. In other words, you cannot fully withdraw Roth first. TSP forces them to be equal based on holdings. So be prepared to roll your TSP to another firm if this is the case. Someone feel free to correct me if this has changed.

Fishing50
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Joined: Tue Sep 27, 2016 1:18 am

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by Fishing50 » Tue Feb 12, 2019 2:29 am

umfan11244 wrote:
Mon Feb 11, 2019 7:56 pm
Also to be noted - I believe that TSP forces you to withdraw TSP/ROTH TSP funds at equal rates. In other words, you cannot fully withdraw Roth first. TSP forces them to be equal based on holdings. So be prepared to roll your TSP to another firm if this is the case. Someone feel free to correct me if this has changed.
No need to worry about withdrawals now. Changes to TSP are expected late in 2019. Rollover is always an option too.

I assume you pay marginal income tax at 22% (income over $102,950 in 2019), effective rate 12.2%. A split between Roth and traditional is probably best with an expected pension. https://thefinancebuff.com/most-tsp-par ... h-tsp.html
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

friuli_croatan
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Joined: Sun Jun 04, 2017 1:57 pm

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by friuli_croatan » Tue Feb 12, 2019 7:51 am

VACat07 wrote:
Mon Feb 11, 2019 6:00 pm

New annual Contributions
$7,500 H Traditional TSP (5% government match)
$7,500 H ROTH TSP (5% government match)
$6,000 H Roth IRA (already funded this year)
$7,000 W Roth IRA (already funded
I am pretty sure you only get one government 5% match and that goes into traditional.

I too am interested in beginning to funding my ROTH TSP. This year I focused on traditional to the max so that I could reduce my tax bracket but with the new tax plan I will not need to do so going forward. The wife will most likely be a SAHM at the end of this year.

JW-Retired
Posts: 7131
Joined: Sun Dec 16, 2007 12:25 pm

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by JW-Retired » Tue Feb 12, 2019 8:50 am

VACat07 wrote:
Mon Feb 11, 2019 6:00 pm
Question: I had been under the assumption that we should start switching most funding to ROTH IRAs (although we've only done 1/2 and 1/2 for the TSP for the last few years). After reading here, I'm not sure if we should move away from the ROTH TSP and just fully fund the traditional TSP. And yes, I know we have not been fully funding the TSP. My husband recently got promoted, so we now have the money to fully fund to $19k. And then keep funding the outside ROTH IRAs. I don't know what our tax rate will be in retirement. We will probably move to a no income tax state. However, with pension, RMDs on the inherited IRA and regular IRAs and SS, I'm thinking we might be higher than or current tax rate. I need to know how to divy up the $19k TSP funding going forward - all traditional TSP, 50/50 split, some other type of split?
All that matters is a pre-retirement/post-retirement marginal tax rate comparison. If you are both really going to be retired from work at age 60 with a 61k/yr pension and whatever your $1.6M savings becomes in 12 years, I would just stick with maxing the current traditional TSP and the 2 Roth IRAs now.

Given your planned move from your current 5.6% state tax to a no income tax state, that probably will cancel out any federal tax increase.
If it doesn't you will still have 10 years to do IRA to Roth IRA conversions after you retire and before taking any social security benefits. Do not take any SS benefits until age 70 since it will be taxed less and you surely want to max out the higher earner (husband?) survivor benefit.
JW
Retired at Last

vasaver
Posts: 28
Joined: Fri Oct 19, 2012 2:15 pm
Location: Virginia

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by vasaver » Tue Feb 12, 2019 10:04 am

Related question on the ROTH vs Traditional TSP allocations.

Can you invest the sub accounts differently? For Example can you specify the Traditional TSP invest in the G Fund and Roth in C,S,I?

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Ketawa
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Location: DC

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by Ketawa » Tue Feb 12, 2019 11:02 am

vasaver wrote:
Tue Feb 12, 2019 10:04 am
Related question on the ROTH vs Traditional TSP allocations.

Can you invest the sub accounts differently? For Example can you specify the Traditional TSP invest in the G Fund and Roth in C,S,I?
No, there is no way to invest them differently.

However, you shouldn't pretend that by putting the G Fund in the Traditional TSP, you would be able to keep more of your returns. You would be investing in a higher risk asset allocation because the government shares in your gains and losses in the Traditional TSP. You can also keep more of your potential returns by holding a slightly higher overall allocation to equities. For more details, see the Bogleheads wiki on Tax-adjusted asset allocation. For this reason, I don't think it's that big of a deal that you can't allocate separately between Traditional and Roth TSP accounts.

vasaver
Posts: 28
Joined: Fri Oct 19, 2012 2:15 pm
Location: Virginia

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by vasaver » Tue Feb 12, 2019 11:08 am

Ketawa wrote:
Tue Feb 12, 2019 11:02 am
vasaver wrote:
Tue Feb 12, 2019 10:04 am
Related question on the ROTH vs Traditional TSP allocations.

Can you invest the sub accounts differently? For Example can you specify the Traditional TSP invest in the G Fund and Roth in C,S,I?
No, there is no way to invest them differently.

However, you shouldn't pretend that by putting the G Fund in the Traditional TSP, you would be able to keep more of your returns. You would be investing in a higher risk asset allocation because the government shares in your gains and losses in the Traditional TSP. You can also keep more of your potential returns by holding a slightly higher overall allocation to equities. For more details, see the Bogleheads wiki on Tax-adjusted asset allocation. For this reason, I don't think it's that big of a deal that you can't allocate separately between Traditional and Roth TSP accounts.
I am actually trying to minimize RMDs, so I want the assets with historically lower returns in the Traditional TSP. But thanks for the info.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by retiredjg » Tue Feb 12, 2019 11:32 am

VACat07 wrote:
Mon Feb 11, 2019 6:00 pm
Question: I had been under the assumption that we should start switching most funding to ROTH IRAs (although we've only done 1/2 and 1/2 for the TSP for the last few years). After reading here, I'm not sure if we should move away from the ROTH TSP and just fully fund the traditional TSP. And yes, I know we have not been fully funding the TSP. My husband recently got promoted, so we now have the money to fully fund to $19k. And then keep funding the outside ROTH IRAs. I don't know what our tax rate will be in retirement. We will probably move to a no income tax state. However, with pension, RMDs on the inherited IRA and regular IRAs and SS, I'm thinking we might be higher than or current tax rate. I need to know how to divy up the $19k TSP funding going forward - all traditional TSP, 50/50 split, some other type of split?
This is a lot of talk on this forum about using tax-deferral as much as possible because tax-deferral is a good thing. However, that applies less to people with a pension. So no, I would not suggest moving to making all the contributions traditional.

You are correct - It is certainly possible that the pension, RMD from the inherited IRA, eventual RMDs from the TSP/IRA, and SS will put you in the same tax bracket in early retirement and maybe a higher tax bracket after age 70. And when one of you dies, the survivor will almost automatically be pushed into a higher bracket still.

Assuming tax rates revert after being low for a few years, you will go back into the 25% bracket. It seems to me that everything you can put into Roth at only 22% (your current rate) is a win. So I'd probably use more than half Roth now, maybe even all Roth if that does not push you into the 24% bracket, at least until tax rates go back up (if they do go back up).

https://thefinancebuff.com/most-tsp-par ... h-tsp.html is a good article on why people with a pension should use more Roth.

Topic Author
VACat07
Posts: 10
Joined: Mon Feb 11, 2019 4:56 pm

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by VACat07 » Tue Feb 12, 2019 1:34 pm

Thanks everyone. I guess the pension is the kicker to stay with more ROTH TSP funding - at least until 2025. I'm already retired and the plan is for husband to retire at 60 with 25 years. He can work until 65 if he gets some great job, but he has mandatory retirement at 65 no matter what. I'll see what I can do about converting traditional IRAs to Roth once he retires and before the main RMDs and SS kick in. I do know that once he retires, I can transfer everything but say $500 out of the TSP to get the ROTH TSP into his Roth IRA (which then won't require any RMDs as opposed to keeping it in the TSP which would require RMD on the Roth), and then immediately transfer back the traditional TSP if I want to use the G fund going forward.

Cheers!

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by FiveK » Tue Feb 12, 2019 2:08 pm

VACat07 wrote:
Mon Feb 11, 2019 6:00 pm
I don't know what our tax rate will be in retirement. We will probably move to a no income tax state. However, with pension, RMDs on the inherited IRA and regular IRAs and SS, I'm thinking we might be higher than or current tax rate.
VACat07 wrote:
Tue Feb 12, 2019 1:34 pm
I'm already retired....
Given the second post, that gives you time to estimate the unknown in the first post. One way to do so is given toward the bottom of the Investment Order post.

You may find the answer (even plus/minus some reasonable uncertainty) points you clearly toward all Roth or all traditional. If so, great - go forth and do that.

You may find the answer could easily be all Roth or all traditional, depending on which of several reasonable assumptions you make. If so, go 50/50 with your contributions.

Whichever answer you get, it's only for this year. Next year you'll have a little more information and a little less uncertainty. Repeat the process. Good luck!

Topic Author
VACat07
Posts: 10
Joined: Mon Feb 11, 2019 4:56 pm

Re: TSP - how to allocate funding between ROTH TSP and Traditional TSP

Post by VACat07 » Tue Feb 12, 2019 3:27 pm

"Given the second post, that gives you time to estimate the unknown in the first post. One way to do so is given toward the bottom of the Investment Order post."

FiveK - thank you. That was a very helpful link.

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