TSP vs IRA

General TSP Discussion.

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cmcguire
Posts: 2
Joined: Tue May 23, 2017 3:23 pm

TSP vs IRA

Post by cmcguire »

Hello all,

I am looking for a little insight on my financial situation and what the best option might be for me.

I am in the FERS retirement system as well as the uniformed service retirement system so I have access to the TSP. At this time I can't put $18k a year into my TSP but I was wondering if it is advantageous to open a Traditional/Roth IRA even though my TSP is not maxed out. One advantage I can think of for opening an IRA is the ability to contribute funds outside of my paycheck (i.e. gifts, side jobs, etc) and have access to Roth IRA funds, if that is what I open, with no penalty.

From my understanding, a Roth TSP does not give you access to your contributions like a Roth IRA would, pretty much whenever you want, so maybe a Roth IRA and a traditional TSP would be the best scenario for me?

What I am thinking is $5500 for an Traditional IRA, which is within my tax bracket limits, and the rest, ~$7k, into a Roth TSP that is matched by my employer.

Jock14
Posts: 61
Joined: Wed Nov 30, 2011 12:14 pm

Re: TSP vs IRA

Post by Jock14 »

cmcguire wrote:At this time I can't put $18k a year into my TSP but I was wondering if it is advantageous to open a Traditional/Roth IRA even though my TSP is not maxed out.


I personally do this. Always, always, always put away 5% first into your TSP. This is due to the fact that the agency matches your 5% giving you an immediate 100% return. After you've matched there are multiple options. The first is to continue putting into the TSP until you reach the $18k/year mark. Another option that I personally do, is invent in an IRA. Roth vs Traditional is another conversation, but my main reason for going outside TSP after 5% is that I have more control. I definitely pay more taxes, but I have more options and can better diversify or choose what to invest in. You can always roll over your TSP when you retire, so the restrictions on taking it out should not govern whether you invest in the TSP vs an IRA.

As far as Roth vs TSP, there really are 2 main things to consider. First, are you in a lower tax bracket now than you will be in the future? Second, can you afford to pay the tax now instead of later? If you can pay the tax now (ROTH), typically it will work out better (my opinion), but if you're budget is tighter you may want to defer the tax (Traditional). I'm about to take a season myself of switching from the ROTH to the Traditional for this purpose.

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evilanne
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Joined: Thu May 14, 2015 6:52 pm

Re: TSP vs IRA

Post by evilanne »

Agree with Jock14 on the 5%. I would recommend the outside IRA be Roth and combination of Roth/Traditional in TSP. (as much Roth as you can afford to do given your earnings and tax situation). Once you begin withdrawing someday if you don't want to take RMDs on the Roth portion, you can transfer that portion of any payment directly to outside Roth account. One of the Roth rules states you the the account must be open for at least 5 years & age 59.5 before normal distributions can be made without penalty. In the event you need to withdraw money for any reason, since taxes are already paid, there shouldn't be any penalty on withdrawing the contributions. Finally, there are some exceptions that will allow you to withdraw tax & penalty free prior to 59.5 so it gives you a little more flexibility. Note: For outside IRA, you have until tax filing due date 2018 to fully fund your account for 2017.

cmcguire
Posts: 2
Joined: Tue May 23, 2017 3:23 pm

Re: TSP vs IRA

Post by cmcguire »

Thank you to both of you for responding. I currently do contribute 5% because like you said, it is a 100% return right off the bat. My next question is how to determine which tax bracket I will be when I retire. Using the calculators on the TSP website I was able to get an estimate and I would be in the same, or lower, tax bracket then I am now, unless TSP/IRA withdrawals count as income. I will also be in the same bracket unless I eventually start a side business or something that generates additional income then I feel that I can safely say I will be in the same tax bracket.

That being said, would the Roth and Traditional TSP combination and a Roth IRA be the best option? I understand some of the advantages of this setup being the ability to transfer the Roth TSP to the Roth IRA to avoid the RMD, hedging against tax bracket changes, and access to Roth contributions when need be.

One last question, if I have a Roth TSP and a Roth IRA can I rollover a percentage of my Roth TSP contributions to my Roth IRA whenever I like so that I can withdraw them in the event of a real emergency? For example, let's say I have $15,000 contributed to my Roth TSP and $10,000 contributed to my Roth IRA. A real emergency occurs and I need $10,000 of my contributed money from my Roth TSP. Would I be able to rollover $10k from my Roth TSP to my Roth IRA for withdraw at no penalty or tax?

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evilanne
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Re: TSP vs IRA

Post by evilanne »

Everything in TSP is done proportionally, so I don't think you can't just transfer the Roth portion. If you do a rollover after your retire, you will need to set up 2 separate accounts--one Traditional and one Roth. If you are still working, a better option may be to take a TSP loan, although generally not recommended. There are In-Service withdrawals but I'm not familiar with how these work or if you can do a rollover to outside IRA(s). see In-Service Withdrawal Basics https://www.tsp.gov/PlanParticipation/L ... index.html

Jock14
Posts: 61
Joined: Wed Nov 30, 2011 12:14 pm

Re: TSP vs IRA

Post by Jock14 »

cmcguire wrote:One last question, if I have a Roth TSP and a Roth IRA can I rollover a percentage of my Roth TSP contributions to my Roth IRA whenever I like so that I can withdraw them in the event of a real emergency? For example, let's say I have $15,000 contributed to my Roth TSP and $10,000 contributed to my Roth IRA. A real emergency occurs and I need $10,000 of my contributed money from my Roth TSP. Would I be able to rollover $10k from my Roth TSP to my Roth IRA for withdraw at no penalty or tax?


The "Rollover" is a 1 time thing that you would do at retirement. One thing you CAN do in your TSP (regardless of Roth/Traditional) is take out a TSP Loan if you have a major emergency. I highly discourage it, but I definitely encourage it over taking from an IRA.

bad70nova
Posts: 245
Joined: Thu Oct 17, 2013 10:18 am

Re: TSP vs IRA

Post by bad70nova »

A question since it was brought up, why does everyone worry about what tax bracket they will be in when retired, or while working either. No matter what tax bracket you are in you start paying taxes on the lowest and work your way up. I am guessing the typical family will retire in the 25% tax bracket ( 37,950 - 91,900) so should you have more money and fall into the 28% tax bracket, you only pay the 28% on anything over 91,900. Am I missing something here?

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evilanne
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Joined: Thu May 14, 2015 6:52 pm

Re: TSP vs IRA

Post by evilanne »

bad70nove...you are on the right track, that is for single taxpayer but same principle applies. For families 25% tax bracket is $75,900-$153,100 for Married Filing Jointly; $50,800-$131,200 Head of Household. The difference between most tax brackets is 5% or lower but there is a 10% difference from 15% to 25% tax brackets and I think this is where most people get hung up. Even a 10% higher marginal tax rate, your tax free earnings over many years should more than cover any tax you paid when money is put into Roth. When you pay off house and children get on their own, you have fewer deduction to reduce taxable income and if you get higher RoR on TSP you are likely to end up in the same or higher tax bracket.

bad70nova
Posts: 245
Joined: Thu Oct 17, 2013 10:18 am

Re: TSP vs IRA

Post by bad70nova »

Evilanne,

You are correct that is the single rate. Thanks for confirming for me I thought it was just me that was not to worried about tax brackets and thought I was missing something everyone else knew. Just like people who get a pay raise and say they lose money because it put them in another tax bracket. They are assuming the entire amount they make now is taxed at a higher rate. Ok I am better now thanks.

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bamablue
Posts: 246
Joined: Tue Jul 24, 2012 11:40 am

Re: TSP vs IRA

Post by bamablue »

I am about to transfer my (Roth) IRA from a Fidelity Cash account to a mutual fund. Does anyone have any recommendations?

This isn't a ton of money and I'm no longer able to make Roth contributions, so it's a 'dead account.' I'm looking for a Fidelity Mutual fund with low fees, moderate risk for about a 5 year run... anybody have a recommendation?

TheProfit
Posts: 10
Joined: Fri Jan 06, 2017 12:28 am

Re: TSP vs IRA

Post by TheProfit »

You may want to look at Vanguard if you haven't already done so.

SeattleSid
Posts: 10
Joined: Fri Dec 30, 2016 7:42 pm

Re: TSP vs IRA

Post by SeattleSid »

I have a Vanguard account, been doing very well over the last 6 years.

Cpayne09
Posts: 46
Joined: Mon May 05, 2014 1:51 pm

Re: TSP vs IRA

Post by Cpayne09 »

bamablue wrote:I am about to transfer my (Roth) IRA from a Fidelity Cash account to a mutual fund. Does anyone have any recommendations?

This isn't a ton of money and I'm no longer able to make Roth contributions, so it's a 'dead account.' I'm looking for a Fidelity Mutual fund with low fees, moderate risk for about a 5 year run... anybody have a recommendation?

#seasonalETFs

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bamablue
Posts: 246
Joined: Tue Jul 24, 2012 11:40 am

Re: TSP vs IRA

Post by bamablue »

I'm not averse to switching to Vanguard. I've been with Fidelity since 1986, but I'm willing to do what's best for my bottom line. Is there a particular mutual fund(s) at Vanguard that you recommend?

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AventadorS
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Joined: Sun Jan 22, 2017 12:12 am

Re: TSP vs IRA

Post by AventadorS »

VFIAX.

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G $18.15 0.05% 1.05%
F $19.08 -0.06% -0.74%
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L2065 $16.38 0.02% 8.37%
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Linc $25.61 0.03% 2.82%

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