Advice on Basic TSP vs. Roth TSP

General TSP Discussion.

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Greenangle
Posts: 45
Joined: Thu Dec 23, 2010 1:30 pm

Advice on Basic TSP vs. Roth TSP

Post by Greenangle »

I guess I'd better introduce myself since I've been a member since 2010 and haven't said hi...so hi! For a while I have been just messing around with the fantasy TSP and have recently started to get serious and have begun following TSP strategy 16517 (Thanks Mjedlin66!).

I'm 28, been in the federal service for about 7 years (30+ more to go!) and am happily married with 5 kids. I love Jesus, my family, my job, and this site, thanks to everyone who contributes, it's been awesome and a big help. I've been telling my co-workers about this site in hopes to help them out so people can enter retirement on the right foot financially.

So, right now since I have so many dependents and make about $77k a year and am the sole breadwinner, my question is, would it make sense to participate in the TSP Roth avenue or would it not really matter? I'm thinking I might as well pay taxes on the TSP contributions now while I have all of these deductions to keep me in a lower income tax bracket as opposed to in retirement when I have very little to write off. What do you think? Would that also affect my gross income and such on my taxes at the end of the year? Any advice from people who know about Basic TSP and Roth TSP would be greatly appreciated.

Thanks!
--Greenangle

Scorpio70
Posts: 432
Joined: Thu Dec 24, 2015 11:49 am

Re: Advice on Basic TSP vs. Roth TSP

Post by Scorpio70 »

I really believe that the Government will change the rules down the road to steal money from people with the Roth accounts. I figure that I will take my tax break upfront while I still can. Hopefully, they will get rid of the AMT as people in your circumstances sometimes get victimized by it.

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onerepmax
Posts: 138
Joined: Tue Aug 08, 2017 9:29 am

Re: Advice on Basic TSP vs. Roth TSP

Post by onerepmax »

This is pretty much a personal choice. In your situation, I'd probably lean toward Roth. Here's why:

You have a large number of exemptions, so the pre tax contribution benefit of traditional probably isn't significant.

Taxes are not likely to be lower in 30 years.

The match all goes into traditional, so you'll be taxed on that when you withdraw. Putting at least something into Roth makes you more "tax diversified"

You can do some of each... say 10% Roth and 5% Traditional, and that will equal out to 10% each.

I also worry about Uncle trying to get his grubby fingers into my Roth...

soapstone
Posts: 10
Joined: Wed Jun 28, 2017 5:21 pm

Re: Advice on Basic TSP vs. Roth TSP

Post by soapstone »

This is something I've thought about too. I do traditional because I worry about future changes to roth.

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RGEN
Posts: 228
Joined: Sun Jan 27, 2013 12:12 am

Re: Advice on Basic TSP vs. Roth TSP

Post by RGEN »

There are certainly risk with ROTH in the future. However, the strategy today is to have both a 401K traditional and a ROTH. The idea is that in retirement you withdraw from the traditional first, then when your taxable income reaches a tax bracket threshold you switch over to ROTH withdrawals to prevent paying taxes in the next higher bracket.
RGEN

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cswift01
Posts: 819
Joined: Thu Dec 08, 2016 10:46 am

Re: Advice on Basic TSP vs. Roth TSP

Post by cswift01 »

Scorpio70 wrote:I really believe that the Government will change the rules down the road to steal money from people with the Roth accounts. I figure that I will take my tax break upfront while I still can. Hopefully, they will get rid of the AMT as people in your circumstances sometimes get victimized by it.
I doubt he would have the AMT

https://en.m.wikipedia.org/wiki/Alternative_minimum_tax

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cswift01
Posts: 819
Joined: Thu Dec 08, 2016 10:46 am

Re: Advice on Basic TSP vs. Roth TSP

Post by cswift01 »

Greenangle wrote:I guess I'd better introduce myself since I've been a member since 2010 and haven't said hi...so hi! For a while I have been just messing around with the fantasy TSP and have recently started to get serious and have begun following TSP strategy 16517 (Thanks Mjedlin66!).

I'm 28, been in the federal service for about 7 years (30+ more to go!) and am happily married with 5 kids. I love Jesus, my family, my job, and this site, thanks to everyone who contributes, it's been awesome and a big help. I've been telling my co-workers about this site in hopes to help them out so people can enter retirement on the right foot financially.

So, right now since I have so many dependents and make about $77k a year and am the sole breadwinner, my question is, would it make sense to participate in the TSP Roth avenue or would it not really matter? I'm thinking I might as well pay taxes on the TSP contributions now while I have all of these deductions to keep me in a lower income tax bracket as opposed to in retirement when I have very little to write off. What do you think? Would that also affect my gross income and such on my taxes at the end of the year? Any advice from people who know about Basic TSP and Roth TSP would be greatly appreciated.

Thanks!
--Greenangle
If I were you I would go traditional and open a Roth on the side for you and your wife.

Also, save for the kids with a Coverdell.

Best

Me

Scorpio70
Posts: 432
Joined: Thu Dec 24, 2015 11:49 am

Re: Advice on Basic TSP vs. Roth TSP

Post by Scorpio70 »

I don't think he will either, but it often comes in with too many deductions.

Timber82
Posts: 166
Joined: Mon Feb 27, 2017 2:39 pm

Re: Advice on Basic TSP vs. Roth TSP

Post by Timber82 »

[quote="cswift01]
If I were you I would go traditional and open a Roth on the side for you and your wife.

Also, save for the kids with a Coverdell.

Best

Me[/quote]

I have been under the impression you can only contribute to an IRA if you have earned at least that much (I.E. If I want to contribute $100 to my wife she must have made at lease $100 in income). I have heard this from numerous podcasts where parents write in asking if they can start an IRA for their children. I assume the rules are the same for if you are an adult. Does anyone know about this?

The Coverdell, I am still kicking around the 529/UTMA/Coverdell myself, did you actually open one and if so for what reasons? If you did not was there any reason for suggesting that over the alternatives, so hard and confusing to make a choice!

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evilanne
Posts: 2067
Joined: Thu May 14, 2015 6:52 pm

Re: Advice on Basic TSP vs. Roth TSP

Post by evilanne »

Your taxable income is very low right now with that many dependents plus any tax credits based on current tax laws. ($77K -$5K FEHB- $12K SD - $28K Exemptions = $32K) For Married filing Jointly:

$0 to $18,650 10% of Taxable Income
$18.6-$75.9K $1,865 + 15% > $18,650

Basically you pay $150 per $1000 invested in TSP Roth but you are not taxed on that amount ever again even if it grows 10X or 20X. (Gov't Matching will still be traditional) With traditional all contributions & earnings are taxed as ordinary income when withdrawn. So if it grows 10X, assuming you are in same tax bracket, your taxes would be 10 X $150 per $1000 for your traditional contributions. General rule is if your tax rate will be same or higher in retirement, Roth is a better option if you can afford to pay the current taxes so I would recommend 100% in Roth. If it is an affordability issue, you can contribute less or split between traditional & Roth--just make sure that you are contributing enough to get all of the Gov't Match of 5%

soapstone
Posts: 10
Joined: Wed Jun 28, 2017 5:21 pm

Re: Advice on Basic TSP vs. Roth TSP

Post by soapstone »

Scorpio70 wrote:I don't think he will either, but it often comes in with too many deductions.
Good point.

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cswift01
Posts: 819
Joined: Thu Dec 08, 2016 10:46 am

Re: Advice on Basic TSP vs. Roth TSP

Post by cswift01 »

Timber82 wrote:[quote="cswift01]
If I were you I would go traditional and open a Roth on the side for you and your wife.

Also, save for the kids with a Coverdell.

Best

Me
I have been under the impression you can only contribute to an IRA if you have earned at least that much (I.E. If I want to contribute $100 to my wife she must have made at lease $100 in income). I have heard this from numerous podcasts where parents write in asking if they can start an IRA for their children. I assume the rules are the same for if you are an adult. Does anyone know about this?

The Coverdell, I am still kicking around the 529/UTMA/Coverdell myself, did you actually open one and if so for what reasons? If you did not was there any reason for suggesting that over the alternatives, so hard and confusing to make a choice![/quote][/quote]

No, you can contribute to your wife's account up to the maximum per year (https://www.marketwatch.com/story/how-t ... 2015-02-24).

I chose Coverdell because I'm not sure if my kids will do their education in the US or Europe. In Europe there are many very respectable universities for less than half the price. I also found the Coverdell to allow for the most flexibility in terms of investments.

That's my choices in a nutshell.

Best,

Me

hmarkway
Posts: 61
Joined: Thu Apr 12, 2012 8:14 am

Re: Advice on Basic TSP vs. Roth TSP

Post by hmarkway »

Greenangle wrote: So, right now since I have so many dependents and make about $77k a year and am the sole breadwinner, my question is, would it make sense to participate in the TSP Roth avenue or would it not really matter? I'm thinking I might as well pay taxes on the TSP contributions now while I have all of these deductions to keep me in a lower income tax bracket as opposed to in retirement when I have very little to write off. What do you think? Would that also affect my gross income and such on my taxes at the end of the year?
While you don't have a super low salary, you have the sole income and many deductions that bring you down to a great level for contributing to the Roth. I'd likely be all over it if I were you. Although, I would consider figuring out what exactly you are willing to contribute each year, and then look at your tax situation with the different scenarios - just Roth, just Traditional, or split - and figure out where your comfort level is. I don't have the deductions that you have, and I'm a single filer, so I max out my traditional, which slays my tax burden. Once I have kids, I'll have to reassess my situation. It's always good to be diversified.

I assume you're in the tax game for the long haul (30+ years to retirement o.O), but if you change your mind and decide to retire early, you can quit the tax game too....
http://gocurrycracker.com/never-pay-taxes-again/
http://www.madfientist.com/traditional-ira-vs-roth-ira/
Current Allocation: 50/50 split F/G Funds, as of 1/3/2018
Strategy: Loosely following Daily Seasonal #16198 until I figure out my 2018 plan when all the main plans start diverging.

Greenangle
Posts: 45
Joined: Thu Dec 23, 2010 1:30 pm

Re: Advice on Basic TSP vs. Roth TSP

Post by Greenangle »

This is all really good stuff, thanks guys (and gals)! I'm think in the near-ish future I may try to diversify and have a split, traditional and Roth. Also, good call on the tax advantaged 529, I am going to seriously consider that as well as that'll help the kids a lot. Our oldest is 4 so we have a lot of time for it to grow before they can use it.

Thanks so much all!
--Greenangle

hugehail
Posts: 602
Joined: Mon Mar 12, 2012 10:05 pm

Re: Advice on Basic TSP vs. Roth TSP

Post by hugehail »

Well after this crappy tax plan goes through you may not have those 7 personal exemptions anymore. That is 28K in additional taxable income Yes the standard deduction would go up to 24K from 12K but that is still 16K in additional taxable income. Now I have heard talk of raising the child tax credit but nothing concrete yet and it may be only for children under age5. Moreover, some of us will have more taxable income into the 25% bracket because of this and if you have an investment property you could really get screwed due to loss of deductions and itemizations since its hard to exceed the 24K standard deduction. That would be fine if we could keep our personal exemptions and contribute to Traditional tax deferred 401K but this "reform" so far targets those. This tax reform plan is not aimed at the middle class. Its meant to cut taxes for big business. They try to sell it by lying and claiming its for the middle class. They have to pay for these big cuts for big business by screwing some in the middle class.

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