Okay, you've got me convinced on the Roth TSP for 2 reasons

[mmmmmbeer]

I have been really kicking around why I at the 28% tax bracket should switch to the Roth TSP and take that tax penalty now as opposed to later at a possibly lower tax rate.

After thinking on it I feel there at least two main reasons for me to do this. I do feel I can reach a pretty decent some in TSP, possibly 7 figures depending on how long I stay in.

I have around 246k right now, all traditional. If I stay in for another 8 or so years with a decent ROR I can be close to that big mark. That being said, with that end game tax rate staring at me that big 1 mil mark seems great... except it's really only 750k with taxes in mind.

The two reasons I think I need to start going 100% Roth TSP are:

#1 - Mortgage Payoff - With traditional TSP it would make zero sense for me to take 300k of that out and get hit with 25% taxes on it to pay off my mortage that is only running me 3.875%. I would need to take out $400k to pay off a $300k loan. That's just ludicris. If I have enough built up in the ROTH side of my account, wouldn't I then be able to take all that out tax free and pay that mortgage off with no additional?

#2 - Children's College - Same deal here. If I were to keep 100% of my TSP in traditional from $246k - 1m say... I wouldn't be able to take $100k out to pay off my kids college if we wanted to go that route? If I put 100% Roth in from now on.... hopefully that would again build up enough to just withdraw that big amount out... or even X amount Roth per month to pay off their tuition.

I think those are two things I hadn't really put into as good a light as I needed too. For those reasons alone I think I'm going to just bite the bullet and go 100% Roth right now, and hopefully that Roth side builds up enough to help the us knock out both the mortgage and kids tuition. That's the main goal to get both those taken care of.... and how knows... maybe help pay for a wedding or two when those times come.

What say yous?

[mjedlin66]

You cannot separate Roth and Traditional for the purpose of TSP withdrawal. You also have limited flixibility for lump sum withdrawals. The TSP only allows you to change your monthly withdrawal once per calendar year.

The good news is, you can roll the TSP into an IRA once you retire, and then you will have the option to withdraw specifically Roth money any time you want.

[mmmmmbeer]

We'll hopefully that TSP update bill passes and We'll have more options eh?

Also is there a limit to the roll-overs to Either IT'S? Say if I have 400k in Roth TSP.. can I roll over 100k of it into a Roth IRA and leave the rest until later?

[evilanne]

The mortgage (if you itemize) & the dependents currently gives you more tax deductions currently so your effective tax rate may be lower than your marginal rate. Based on your anticipated RoR, I think it makes sense.

#1 If you withdrew $400K traditional you would be in 33-35% tax bracket. If you are making more on your TSP than what your interest rate is, many would tell you not to pay of your mortgage early.

#2 With TSP, withdrawals are proportional unless you roll over after retiring. If you are retired but under 59.5, you can transfer Roth amounts of monthly payments to Roth IRA and amounts will continue to grow tax free. You can withdraw from the Roth IRA without penalty for educational expenses but this could impact educational credits prior to 59.5.
--Withdrawals of traditional TSP amounts increases your taxable income which would limit any financial aid that your children may be able to get. If you still working & in a higher tax bracket when they go to college it won't matter but if you retire early it could. A TSP loan if you are still working wouldn't change your income and may be more beneficial. In any case Roth should give you more flexibility but there are many moving parts depending on your age, income & working status.

If something happens to either you or your spouse (hopefully not), Single or HoH income ranges are lower so Roth is better for surviving spouse.

[mmmmmbeer]

Meh... the gs14 salary alone precludes the kids from ever getting any financial aid.

It's either us or loans for them. Outside of scholarships etc..

I for some reason thought Roth TSP would have had me investing less a month.. but yeah just figured out that's not the case.

[SnareMV17]

Assuming you become a TSP millionaire at some point, it might be pretty difficult to hit $400k in Roth TSP balance if you've already got a $276k head start in traditional. Remember, it doesn't matter how much you contribute to the Roth TSP, 100% of agency matching funds go in your Traditional TSP account. So the traditional will continue to receive matching contributions and interest on a $276k principal while your Roth TSP principal starts from zero.

Also, remember that the biggest benefit of Roth is that you don't EVER pay taxes on earnings. With a traditional TSP you will pay taxes on everything. So that will make a huge difference over one, two, or three decades.

[maxbobcat]

Assuming you become a TSP millionaire at some point, it might be pretty difficult to hit $400k in Roth TSP balance if you've already got a $276k head start in traditional. Remember, it doesn't matter how much you contribute to the Roth TSP, 100% of agency matching funds go in your Traditional TSP account. So the traditional will continue to receive matching contributions and interest on a $276k principal while your Roth TSP principal starts from zero.

Also, remember that the biggest benefit of Roth is that you don't EVER pay taxes on earnings. With a traditional TSP you will pay taxes on everything. So that will make a huge difference over one, two, or three decades.

Yeah, but you get market gains on everything as well.

[SnareMV17]

Not tax free you don't.

[mindofmush]

Lots of alternatives:
Consider NOT paying off the mortgage with a lump sum.
You might want to move after the kids go to college, into a more cozy home or even to another state.
Paying down the principal during the first half of a 30 year mortgage can significantly shorten that loan.

[mmmmmbeer]

Lots of alternatives:
Consider NOT paying off the mortgage with a lump sum.
You might want to move after the kids go to college, into a more cozy home or even to another state.
Paying down the principal during the first half of a 30 year mortgage can significantly shorten that loan.

Sure sure... just dreaming a bit man.

[James1018]

So....did you make the switch? If so..why? if not...why not? I have guys at that debate which is better..?

[mmmmmbeer]

So....did you make the switch? If so..why? if not...why not? I have guys at that debate which is better..?

I did... then I went back traditional as we had a few new bills that sort of came out of nowhere. I'll probably end up doing it gain in the next few pay periods.

[mmmmmbeer]

So....did you make the switch? If so..why? if not...why not? I have guys at that debate which is better..?

I did... then I went back traditional as we had a few new bills that sort of came out of nowhere. I'll probably end up doing it gain in the next few pay periods.

OH HELLLLo... I just checked my paycheck and apparently I never did change it back! Haha... I've been doing Roth TSP the last 3 pay periods! Sheesh... shows you how much I pay attention.

So I have 2,137.00 of Roth TSP contributions so far.

So why? Essentially I have 7 years until I can retire at my minimum age. I figure... with 7 years from now until then and everything now going into Roth TSP growing tax free below is what I'll have tax free if I can meet my goal of 12% CAGR:

Your existing account balance $2,137.00

Growth of your existing account balance $2,587.22

Your future contributions $178,895.86

Growth of your future contributions $92,313.42

Total estimated Roth TSP account balance $275,933.50

The remaining, meaning my traditional TSP, currently is a decent chunk of change again if I can get that 12% targeted growth:

Your existing account balance $260,476.00

Growth of your existing account balance $315,353.43

Your future contributions SEE ABOVE ROTH BALANCE

Growth of your future contributions SEE ABOVE ROTH BALANCE

Total estimated TSP account balance $575,829.43

So.... I think the tentative plan is now to take that $275, 933.50 upon retirement and move the entire Roth TSP balance into a Roth IRA that I can move stuff around and do a seasonal or daily plan with just the Roth. That way if I ever get into a bind and want some or all of that $275K+ I can withdraw it without penalty, depending on my age, but the plan will be to allow that to keep growing without withdrawing.

Maybe I'll draw just from the regular TSP after I withdraw..... if I have that right and I can withdraw just the TSP Roth balance?

[evilanne]

Currently everything is proportional, but you can direct your Roth portion to an outside Roth IRA. Still waiting for them to change the withdrawal options...could be different when you reach retirement.

[mmmmmbeer]

Currently everything is proportional, but you can direct your Roth portion to an outside Roth IRA. Still waiting for them to change the withdrawal options...could be different when you reach retirement.

So "direct your Roth portion to an outside Roth IRA" whassat mean? Like do I have to do it now or could I like wait until I've got 500k in there and do it then? Thus making that all eligible to withdraw if I'm 55 or whatever?

Oh and I just figured out my numbers are off up there. My growth of my Roth balance will only get me to around $202k in 7 years of compounded interest.

I forgot the match is going into the traditional balance.

Oh well... even if I don't transfer it out... it will continue to grow along with the traditional even if I take a draw. I guess a good thing would be that if/when I reach 59 1/2, I should have enough built up in the Roth part, that if I get a wild hair, I'll transfer that portion to a Roth IRA and take it all out at once, to say... pay off the house or pay for my kids college or whatever.