Welcome Guest! To enable all features please Login or Register.

Notification

Icon
Error

TSP

Administered by the Federal Retirement Thrift Investment Board, this defined contribution plan for federal employees has roughly 4,614,874 participants, and over $358 billion in assets under management. Ask your TSP questions and post related topics here.

Options
Go to last post Go to first unread
thewhiz  
#1 Posted : Wednesday, November 28, 2018 5:04:37 PM(UTC)
thewhiz

Rank: Groupie

Groups: Registered
Joined: 8/19/2018(UTC)
Posts: 58
United States
Location: CT

I will be a new federal employee very soon and I am very excited. With the 5% contribution to TSP, is this for pre tax TSP only?. Or does this include Roth TSP too?

roger.d  
#2 Posted : Thursday, November 29, 2018 11:22:08 AM(UTC)
roger.d

Rank: Senior Member

Groups: Registered
Joined: 8/25/2016(UTC)
Posts: 2,842
United States
Location: Midwest

Thanks: 127 times
Was thanked: 709 time(s) in 554 post(s)
Originally Posted by: thewhiz Go to Quoted Post
I will be a new federal employee very soon and I am very excited. With the 5% contribution to TSP, is this for pre tax TSP only?. Or does this include Roth TSP too?



You choose if you want to fund a traditional or ROTH TSP


Your agency's match will go into a triditional TSP.



Learn to discipline yourself, so someone else doesn't have to
Starry  
#3 Posted : Tuesday, December 25, 2018 10:26:31 AM(UTC)
Starry

Rank: Member

Groups: Registered
Joined: 2/8/2016(UTC)
Posts: 19
United States
Location: Florida

Thanks: 19 times
Hi, I am fairly new and would like to know how to switch from the Traditional to the Roth. Can you explain?

Merry Xtmas!
Endless Summer  
#4 Posted : Tuesday, December 25, 2018 11:11:21 AM(UTC)
Endless Summer

Rank: Senior Member

Groups: Registered
Joined: 6/7/2016(UTC)
Posts: 672

Thanks: 15 times
Was thanked: 159 time(s) in 139 post(s)
Originally Posted by: Starry Go to Quoted Post
Hi, I am fairly new and would like to know how to switch from the Traditional to the Roth. Can you explain?

Merry Xtmas!


The thing to take into consideration is contributions to a traditional IRA are tax deductible but withdrawals are taxed. It's the opposite with a ROTH, you pay taxes on the contributions but not on the withdrawals.

People read this as saying that the ROTH is a much better deal, because the $3,000 that you contribute this year and pay taxes on will turn into $9,000 twenty years from now that you can withdraw tax free.

This is mathematically dishonest. In order to have $3,000 after taxes to contribute to a ROTH, you'd need to earn about $4,000 before taxes to be left with $3,000 for deposit. With a traditional IRA, you'd deposit the entire $4,000 which, in our example, would rise to $12,000 in twenty years. You will be taxed on any withdrawals from this. The net effect on you current income would be the same, but you contribute more to the trad.

It's generally assumed that you will be in a lower tax bracket when you retire than what you are currently in which makes the trad a better bet. If the tax bracket is unchanged the two IRA's come out exactly even.

Do the math for yourself. Make a spreadsheet showing a $3,000 contribution every year for 10 years with an annual return of 8% or whatever you choose. do the same for a contribution of $4,000 per year at the same return. Assume you'll be in a high tax bracket of 25% when you start to take your withdrawals from the $4k account and compare that to the other account. There is no difference.

The ONLY advantage to a ROTH is there are no minimum required disbursements at age 70-1/2 but this can be worked around.

Merry Christmas...
roger.d  
#5 Posted : Tuesday, December 25, 2018 5:27:59 PM(UTC)
roger.d

Rank: Senior Member

Groups: Registered
Joined: 8/25/2016(UTC)
Posts: 2,842
United States
Location: Midwest

Thanks: 127 times
Was thanked: 709 time(s) in 554 post(s)
Originally Posted by: Starry Go to Quoted Post
Hi, I am fairly new and would like to know how to switch from the Traditional to the Roth. Can you explain?

Merry Xtmas!


To answer your question, it depends on the agency you work for. What ever system you use to change the amount you contribute, should also allow you to direct your contribution to the TSP account of your
choice.

This is not done on the TSP website.



Learn to discipline yourself, so someone else doesn't have to
FatHappyCat  
#6 Posted : Tuesday, December 25, 2018 6:35:02 PM(UTC)

Rank: Senior Member

Groups: Registered
Joined: 1/9/2011(UTC)
Posts: 697

Thanks: 3 times
Was thanked: 105 time(s) in 91 post(s)
Originally Posted by: Endless Summer Go to Quoted Post
Originally Posted by: Starry Go to Quoted Post
Hi, I am fairly new and would like to know how to switch from the Traditional to the Roth. Can you explain?

Merry Xtmas!


The thing to take into consideration is contributions to a traditional IRA are tax deductible but withdrawals are taxed. It's the opposite with a ROTH, you pay taxes on the contributions but not on the withdrawals.

People read this as saying that the ROTH is a much better deal, because the $3,000 that you contribute this year and pay taxes on will turn into $9,000 twenty years from now that you can withdraw tax free.

This is mathematically dishonest. In order to have $3,000 after taxes to contribute to a ROTH, you'd need to earn about $4,000 before taxes to be left with $3,000 for deposit. With a traditional IRA, you'd deposit the entire $4,000 which, in our example, would rise to $12,000 in twenty years. You will be taxed on any withdrawals from this. The net effect on you current income would be the same, but you contribute more to the trad.

It's generally assumed that you will be in a lower tax bracket when you retire than what you are currently in which makes the trad a better bet. If the tax bracket is unchanged the two IRA's come out exactly even.

Do the math for yourself. Make a spreadsheet showing a $3,000 contribution every year for 10 years with an annual return of 8% or whatever you choose. do the same for a contribution of $4,000 per year at the same return. Assume you'll be in a high tax bracket of 25% when you start to take your withdrawals from the $4k account and compare that to the other account. There is no difference.

The ONLY advantage to a ROTH is there are no minimum required disbursements at age 70-1/2 but this can be worked around.

Merry Christmas...


OK, let's be real here....you make the assumption that the entire 25% tax refund of the contributed amount will be invested. I don't have any hard data to show exactly what percentage of people does this, but I'm going to say that most people don't do this. Assuming they haven't blown it on the new 4k TV or whatever, even fiscally-savy people are still better off paying down their 16%+APR CC given 50% of Americans carry a balance.
Endless Summer  
#7 Posted : Tuesday, December 25, 2018 7:11:40 PM(UTC)
Endless Summer

Rank: Senior Member

Groups: Registered
Joined: 6/7/2016(UTC)
Posts: 672

Thanks: 15 times
Was thanked: 159 time(s) in 139 post(s)
Originally Posted by: FatHappyCat Go to Quoted Post
...
OK, let's be real here....you make the assumption that the entire 25% tax refund of the contributed amount will be invested. I don't have any hard data to show exactly what percentage of people does this, but I'm going to say that most people don't do this. Assuming they haven't blown it on the new 4k TV or whatever, even fiscally-savy people are still better off paying down their 16%+APR CC given 50% of Americans carry a balance.


You make an excellent point, no arguing with the fact that many people will just spend the tax refund, but that doesn't change the fact that they have that money to use as they see fit. To put $4,000 into their respective accounts the ROTH investor reduced his after tax income by $5,000 while the traditional IRA investor reduces his after tax income by $4,000.

I assumed the OP was asking about the best investment strategy. If that's the case, and they have the discipline to invest the refund rather than buying that big screen tv, then I'm convinced that there is a slight edge to the traditional IRA over the ROTH. Also agree that being debt free should be the first priority, particularly with those high % loans or student debt.
roger.d  
#8 Posted : Wednesday, December 26, 2018 9:59:10 AM(UTC)
roger.d

Rank: Senior Member

Groups: Registered
Joined: 8/25/2016(UTC)
Posts: 2,842
United States
Location: Midwest

Thanks: 127 times
Was thanked: 709 time(s) in 554 post(s)
Originally Posted by: Endless Summer Go to Quoted Post
Originally Posted by: FatHappyCat Go to Quoted Post
...
OK, let's be real here....you make the assumption that the entire 25% tax refund of the contributed amount will be invested. I don't have any hard data to show exactly what percentage of people does this, but I'm going to say that most people don't do this. Assuming they haven't blown it on the new 4k TV or whatever, even fiscally-savy people are still better off paying down their 16%+APR CC given 50% of Americans carry a balance.


You make an excellent point, no arguing with the fact that many people will just spend the tax refund, but that doesn't change the fact that they have that money to use as they see fit. To put $4,000 into their respective accounts the ROTH investor reduced his after tax income by $5,000 while the traditional IRA investor reduces his after tax income by $4,000.

I assumed the OP was asking about the best investment strategy. If that's the case, and they have the discipline to invest the refund rather than buying that big screen tv, then I'm convinced that there is a slight edge to the traditional IRA over the ROTH. Also agree that being debt free should be the first priority, particularly with those high % loans or student debt.



I am not sure how you interpreted the 2 posts to be asking for the best investment strategy, Traditional vs ROTH.

Your position on savings on taxes now vs later are valid.

I am understanding now that this is a very complex questions. And not a one size fits most. It will depend on State and local income taxes now. And if State and local taxes are levied on retirement income.

How much of a difference will it be? The most important thing is to be participating well above the 5% match.

IMO, even with new withdrawal options coming this year, 5% to the TSP, then max out an IRA, then add as you can to the TSP is the best option.

Using a low cost mutual fund family for the IRA.

Edited by user Wednesday, December 26, 2018 10:07:32 AM(UTC)  | Reason: Spellcheck

Learn to discipline yourself, so someone else doesn't have to
Rss Feed  Atom Feed
Users browsing this topic
Guest
Forum Jump  
You cannot post new topics in this forum.
You cannot reply to topics in this forum.
You cannot delete your posts in this forum.
You cannot edit your posts in this forum.
You cannot create polls in this forum.
You cannot vote in polls in this forum.


This page was generated in 1.073 seconds.