Roth or not to Roth

[ArrieS]

One thing I think most people don't consider is their children's children and out.

If you look at the rules for both ROTH and Traditional IRAs that are inherited, they don't survive past your children. The rule is life expectancy divided by the amount in the account. So the older they get the more they have to take out. So when their life expectancy is 1, the inherited IRA has to be completely emptied

I want to leave something that survives past the first generation. Unfortunately that means paying taxes by creating a taxable trust. But by doing that you actually can create something that will survive and benefit many generations.

Just something to think about, trying to avoid taxes means leaving something that won't survive past your children. But, if you didn't care about avoiding taxes and you left enough, it could be a perpetual trust that could do great things, like paying for college for several generations.

[crondanet5]

I know someone who might be able to help you. It is an area I always thought poorly of but now I am changing my mind. She does about ten million dollars in business a year.

[crondanet5]

Generational succession is such a difficult thing to accomplish. What if two generations out there is no third generation? What if the family grows geometrically while the account grows arithmetically? What if all the money in the account is needed for medical or other reasons by a family member?

I have also wondered what is a good investment to use for multi-generation accounts? Think of the accounts that disappeared when GM declared bankruptcy. ENRON. It is very difficult to figure out. Good luck with this.

[TSPGains]

I think it all depends on whether you plan on making money on your TSP (and who doesnt?). For instance. Say you make 50k a year and contribute 5% of your income for 30 years ($2500 per year for 30 year means $75,000 in contributions). During these 30 years you couldve paid 20% taxes on your $2500 when in roth ($500x30=$15,000) vs saving those $15,000 for tax exempt contributions (trad). But lets say you made 10% average each year ($2500 each year times 10% compounded = $415,200.83).

Would you rather pay taxes on your 415k or simply pay $15,000 (total) during the 30 years? If on traditional, you would need an impossible tax rate for retirement at 3.61% in order to emulate paying $15k on your 415k earnings.

If you are planning on not making any significant amount of money (say, 30 years in the G fund), then your $15k tax contributions for roth during this time would be equivalent to paying the tax on traditional at 13.65% on compounded earnings of $109,884.66 (assuming earnings of 2.5% each year on the G fund).

In a nutshell:
Trad vs Roth on 10% earnings = Roth wins (unless taxes are less than 3.61% due at retirement which is impossible)

Trad vs Roth on 2.5% earnings = Roth wins (unless taxes are less than 13.65% due at retirement which could be possible, maybe in an Utopian world)

These calculations were based on assumptions that income tax bracket was at 20% each year. Also assumed no pay increases for 30 years. Also assumed a consistent 15% gain (or 2.5%) on the proposed scenarios. Different tax brackets could be used to calculate retirement taxation for traditional contributions at 10 - 35% ranges to provide contrast.

[Jock14]

The basics of Roth vs Traditional come down to your tax bracket now (x%) vs when you withdraw (y%). If x > y, Traditional is better as it allows you to pay taxes at y%. If y > x, Roth is better as it allows you to pay taxes at x%. If they are the same, it doesn't matter.

A few things to keep in mind regarding just looking at your expected taxable income is your expected tax deductions. Often people wont be paying as much interest on loans when they retire, leading to quite a bit (sometimes 10s of thousands of dollars) less tax deductions. This can (and to some sense should) affect your expected y% when deciding if you should do Roth or Traditional.


Also, Roth matching happens the same as Traditional. If you contribute 5% Roth, you will get 5% matching. You don't have to do the dollar amount after taxes. But do note that ALL matching funds go to the Traditional account of TSP (which is taxed in the future)

That's the basic analysis you (and/or your financial advisor) need to make when questioning "to Roth, or not to Roth" for TSP.

[skeelo1811]

Good stuff to digest. My advisor has suggested that I go all in on Roth and it seems from feedback that this is the right call for me and my financial future.

[TSPGains]

It does matter Jock14 (when both tax % are the same), as the only tax you pay for roth are on your contributions whereas on traditional you pay tax on both contributions and earnings.

[Atbattin]

Please pardon the double posting if this comment appears twice, but it didn't seem to load when I first submitted it.

I'm hoping to get further clarification on where it is best to invest in Roth (inside TSP or outside TSP). I thought this was addressed in an earlier thread that differentiated between IRA, Roth-IRA, and Roth-TSP.

The conclusion I drew from a prior discussion was to max the pre-tax TSP contribution ($18,000) plus the $6,000 pre-tax TSP catch-up (I'm over 50), to lower my taxable AGI (adjusted gross income).

I also came away thinking that it was best to pursue a Roth-IRA outside of TSP. The idea being that any post tax Roth-TSP contributions would reduce the $18,000 pre-tax advantage, or $6,000 pre-tax catch up.

I realize everyone's situation may be different. Regardless, I'm always looking to learn from those more knowledgeable, so thanks in advance for your patience if I missed this. Thanks!

[ArrieS]

Also, keep in mind you can roll over your TSP into a ROTH IRA. You'll pay taxes on the Traditional part, but then what's left will be tax free. That maybe worth it if you retire at 55 and have a good number of years left.

[ArrieS]

Please pardon the double posting if this comment appears twice, but it didn't seem to load when I first submitted it.

I'm hoping to get further clarification on where it is best to invest in Roth (inside TSP or outside TSP). I thought this was addressed in an earlier thread that differentiated between IRA, Roth-IRA, and Roth-TSP.

The conclusion I drew from a prior discussion was to max the pre-tax TSP contribution ($18,000) plus the $6,000 pre-tax TSP catch-up (I'm over 50), to lower my taxable AGI (adjusted gross income).

I also came away thinking that it was best to pursue a Roth-IRA outside of TSP. The idea being that any post tax Roth-TSP contributions would reduce the $18,000 pre-tax advantage, or $6,000 pre-tax catch up.

I realize everyone's situation may be different. Regardless, I'm always looking to learn from those more knowledgeable, so thanks in advance for your patience if I missed this. Thanks!

I think most people would agree here that you should contribute up to your agency match. Then, contribute to an IRA outside. After you are able to max the IRA comfortably continue to contribute to the TSP.

The reason being that the TSP is extremely limited with what you can do with your money.

As for ROTH or Traditional you said it yourself everyones situation is different so you should provide more information about yourself to help with the advice.

How old are you, are you married, what tax bracket are you in, how long to do you have to invest, do you anticipate moving up a lot in your career.

[evilanne]

Also, keep in mind you can roll over your TSP into a ROTH IRA. You'll pay taxes on the Traditional part, but then what's left will be tax free. That maybe worth it if you retire at 55 and have a good number of years left.

I think you can rollover your TSP into two separate accounts--An IRA and a Roth IRA, if you have both in TSP. Because TSP pays out everything proportionally, you would have to do 2 separate accounts. There are ways of converting retirement to Roth IRA, I don't understand these backdoor Roth IRAs but it is an option--just make sure you understand the rules and you may want to ,talk to your tax, legal and financial advisors to make sure you do it properly if you choose to do so. If you mess up it could be considered an early withdrawal and result in a penalty.

The Roth option for TSP is relatively recent(~ 4 years). For me, it made more sense to have the Roth outside of TSP and had the money to do it in addition to TSP. For younger employees, I think it makes more sense to use Roth if it doesn't severely limit the amount they are able to contribute. It is ideal for deployed military with tax free earnings. With Roth IRA, you also have until 15 April to fund your IRA.

[Jock14]

Also, keep in mind you can roll over your TSP into a ROTH IRA. You'll pay taxes on the Traditional part, but then what's left will be tax free. That maybe worth it if you retire at 55 and have a good number of years left.

I think you can rollover your TSP into two separate accounts--An IRA and a Roth IRA, if you have both in TSP. Because TSP pays out everything proportionally, you would have to do 2 separate accounts. There are ways of converting retirement to Roth IRA, I don't understand these backdoor Roth IRAs but it is an option--just make sure you understand the rules and you may want to ,talk to your tax, legal and financial advisors to make sure you do it properly if you choose to do so. If you mess up it could be considered an early withdrawal and result in a penalty.

Again the basics come down to taxes and if you pay more getting taxed now or later. As ArrieS said, you pay taxes when you move anything from traditional to ROTH. Therefore, if you move everything at once from Traditional to ROTH, you're paying all of your taxes up front and at one time. This may be beneficial, but if you already have half your income tax free, you probably can spread out when you pay the taxes (by keeping the money in a Traditional fund) in order to pay less in taxes. Plus if you roll it into a Traditional IRA (outside TSP) you can withdraw from it at your own pace (typically) so you can control how much taxes you pay per year.

[wisepierre]

The proper way to take care of your family for generations, is to create a trust(s) that only provides new family members money for the first 18-22 years of their life. When they are not adults, enough money to take care of them. If they choose to attend college, have that paid for. After they graduate, they are on their own. Having a "free" education is a huge leg-up on everyone else around them, and that alone puts them at a huge economic advantage over their peers.

[kohliekohl]

Been a long time since I have posted, but I'm on this site everyday for the wealth of info. I am all in Roth. Unless you really need the tax break now, which some entry level employees do, I would rather get my tax saving when I'm in a higher tax bracket in my golden years .