To ROTH or Not to ROTH, That is the question...

[snaffu]

Hello all, I see that we can get to this site from DOD addresses again..YEY!!! Anyway..

I'm about half thru my civilian career, and have packed $$ away in the traditional TSP without giving much consideration to ROTH.. until recently.. I was challenged to compare the two and what I found out was AMAZING unless I'm doing something wrong..

Basic assumptions..
- 100% ROTH contributions from here on out,
- Retire in 10 years (23 total)
- 8% growth annually (staying in the high risk pools)
- Equally burn traditional TSP over 20 years after retirement
- use ROTH to maintain lifestyle
- staying on the 25% +/- income tax bracket. I'm not concerned if I have the taxes just right, since I applied them equally to both sides.

I created a .xls with a side-by-side of 2 scenarios.. Stay in TSP or split now and go ROTH from now on. (PM me w/ email if you want to see my numbers..)

Trying to take Taxes, withdraws, gains, etc into consideration and applying equally as best I can to both scenarios, By the time I had depleted my TSP, I would have 150K left in my ROTH account while having an income of aprox 90K/yr.

I would like to hear is anyone else had tried this comparison and results..

[mjedlin66]

Hello all, I see that we can get to this site from DOD addresses again..YEY!!! Anyway..

I'm about half thru my civilian career, and have packed $$ away in the traditional TSP without giving much consideration to ROTH.. until recently.. I was challenged to compare the two and what I found out was AMAZING unless I'm doing something wrong..

Basic assumptions..
- 100% ROTH contributions from here on out,
- Retire in 10 years (23 total)
- 8% growth annually (staying in the high risk pools)
- Equally burn traditional TSP over 20 years after retirement
- use ROTH to maintain lifestyle
- staying on the 25% +/- income tax bracket. I'm not concerned if I have the taxes just right, since I applied them equally to both sides.

I created a .xls with a side-by-side of 2 scenarios.. Stay in TSP or split now and go ROTH from now on. (PM me w/ email if you want to see my numbers..)

Trying to take Taxes, withdraws, gains, etc into consideration and applying equally as best I can to both scenarios, By the time I had depleted my TSP, I would have 150K left in my ROTH account while having an income of aprox 90K/yr.

I would like to hear is anyone else had tried this comparison and results..

If you are comparing an "EQUAL" contribution, then it's a faux comparison. For example, comparing a $100 Roth contribution to a $100 Traditional contribution. OR, comparing $19k/year of Roth to $19k/year of Traditional.

The reason this is a faux comparison is because contributing an "equal amount" to Roth actually costs you substantially more money out of pocket (For example, $100 Roth contribution + taxes).

When people do this comparison, what they are really concluding, without seeing the forest through the trees, is that "spending more money on my retirement right now will put me in a better situation in the future."

Which is a great thing, don't get me wrong. But I used to think Roth was always better, and it was because I was missing this fundamental point. If me and my coworker make the same salary and contribute the same percentage of that salary, but he is Roth and I am Traditional, then he is spending WAY more money on his retirement than I am. And of course, that should mean he is more comfortable in retirement.

With the same scenario, I would have to contribute MORE of a dollar or percent in order to have an "Equivalent" contribution. Basically, I would have to contribute to my Traditional account whatever his Roth contribution + taxes adds up to. Then, we are both spending the same amount of money right now. And then, the comparison is a hell of a lot closer.

In fact, if you are in the same tax bracket for all of retirement as you are right now while making contributions, then the Roth vs Traditional thing boils down to a complete wash. That's right, dollar-for-dollar, penny-for-penny, EXACTLY the same after-tax balance.

Most often, however, that's not the case. You need to take your tax bracket now vs retirement into account. And throw in whatever political changes to the tax code you are personally anticipating. Also, if you are moving states between now and retirement, then consider state income tax.

Finally, even if you are working and retiring in the exact same tax bracket (unusual), then the slight advantage would probably go to Roth, simply because it is better suited for rolling into an inheritance once you pass. Traditional has kind of the opposite benefit, in which it is possible for you to retire younger and access your funds via the rule of Substantially Equal Periodic Payments (SEPP, Rule 72(t)).

[cswift01]

Dear Snaffu,

Years ago I was told that you had to make your traditional contribution in order to get the match, with the rest being able to be placed in the Roth. From what I understand now, that is not the case and you can put all your money in the Roth and the government will still match (up to the 4% amount, even if it all goes into the traditional).

Either way, I do put some in the traditional as I have no clue what my tax situation will be in the future. I would suggest the same, although others might disagree.

Here is an article you could read:

https://federalnewsnetwork.com/mike-cau ... t-to-love/

A calculator to help you decide:

https://www.calcxml.com/do/ret10?lang=en

In general, I would look at my MAGI. If its less than $80000 then a traditional might be better. That is only from a cursory look.

Thanks,

Me

[wingchaser]

My approach, for what it’s worth, is to maximize my Traditional TSP ($19,000 per annum) & maximize my ROTH ($7,000 per annum) thru Fidelity. I choose Fidelity for the ROTH IRA because of the vast array of investment vehicles they offer...

I love short-term exposure to Leveraged (2x/3x) ETFs...

Best of Luck (everyone) in all you choose to endeavor!!!

[searight]

For me state and local taxes was a huge consideration. Right now I pay very high SALT, but I will retire in a state that doesn’t tax as much. Say Maryland vs Florida. So using traditional saves me 10% taxes to Maryland.

So, if I invest $100k in Roth and traditional with a preretirement tax rate of 40% and a post retirement of 30% for 10 years then I end up with $120k spendable post tax from the Roth and $140k post tax spendable money for the traditional.

[snaffu]

Thanks for the input.. Thanks Cswift for the calc pages, final found one that takes current savings into account and cross-checked some of my numbers.

After reading mjedlin66 response, I went back and tweaked my .xls.. I made both traditional TSP run down in 20 yrs, and the pay out the same per month/year.. and like he said, the total taxes paid came out only slightly in favor of the ROTH after 20 years.. Bummer..

Where I did see a noticeable change was the $$ I had left over in the ROTH account after 20, about $450K. I doubt I will be here to see it, but it should be a nice start on collage for the grand kids.

I may have mislead in my original post, The 90K was total earnings from all sources. TSP came out to 44K/year. SS, Mil/civilian retirement estimates make up the rest and are probably on the high side.

Also, I'm aware that of the 14.4K allocation per /yr, in the ROTH, that equates out to around 10K due to taxes, but in at least the first year, I'm going to keep my allocation at $500/payday (+matching) and eat the taxes.. We'll see what next years tax return looks like or how much damage there is to each paycheck now.. but that's the plan.

[wingchaser]

On the subject of COLLEGE FOR THE GRANDKIDS, make sure to check into their State’s PREPAID College Fund, I’ve been able to educate both of my boy’s @ a cost of $75.00/month (each) because I acted right out of the gate..

If you were to pick up the expense ($150-$200 a month), depending on their age, it would make for an incredible gifting moment!!!

Best of Luck (everyone) in all you choose to endeavor!!!

[apple0409]

Isn't a Regular Roth good to have to roll your Roth 401K into eventually? Like for the Backdoor option? So you can contribute more into the Roth and let it sit longer.
Not sure if the math is the same.
With the rule of the TSP Roth 401K don't you have to take RMD's at 70? So if you roll your 401K Roth into a regular Roth it can continue to compound after 70 with no interruption? I read somewhere that if you have a regular Roth established 5 years before you retire you can do that.

[harryface]

I have to disagree with mjedlin66 because it doesn't sound like you are taking into consideration the taxes paid on the gain of the traditional versus the taxes paid on the contribution of the Roth.
For easy math: If you contribute the total $19,000 and you are in the 25% tax bracket then you are paying $4,750 in taxes on that $19k but you are getting the 8% gains for the 10 years tax free (from snaffu's exmaple at the top) when you withdraw it in retirement. This means that your tax bracket will be lower because some/much of your income will be tax free.

The advantage of Roth comes in the withdrawal of the funds and the fact that you don't pay income tax on the growth. With Traditional you save the $4750 in taxes today but you pay income tax on the full amount put in and the growth.

If you need tax deduction now then you are better off to start a side business based on a hobby and take business right offs. The business might even take off and become a full time gig in retirement providing you additional income.

[mjedlin66]

I have to disagree with mjedlin66 because it doesn't sound like you are taking into consideration the taxes paid on the gain of the traditional versus the taxes paid on the contribution of the Roth.
For easy math: If you contribute the total $19,000 and you are in the 25% tax bracket then you are paying $4,750 in taxes on that $19k but you are getting the 8% gains for the 10 years tax free (from snaffu's exmaple at the top) when you withdraw it in retirement. This means that your tax bracket will be lower because some/much of your income will be tax free.

The advantage of Roth comes in the withdrawal of the funds and the fact that you don't pay income tax on the growth. With Traditional you save the $4750 in taxes today but you pay income tax on the full amount put in and the growth.

If you need tax deduction now then you are better off to start a side business based on a hobby and take business right offs. The business might even take off and become a full time gig in retirement providing you additional income.

Disagreeing is fine, but the numbers don't support your conclusion.

Using your own example:

1. The tax paid is actually $6333, not $4750. That's because the 19k is after-tax income. So you're paying tax on more than 19k. X - .25X = 19k. X is $25,533. So tax paid is 25% of that, which is $6333.
2. Now add that $6333 onto the 19k. That's an equivalent traditional contribution. If Joe Roth contributes 19k to his Roth TSP, and Jill Traditional contributes $25,333 to her Traditional TSP, then they are spending the same amount of money on their retirement.
3. So Jill is going to have a MUCH larger balance come retirement. Yes, she'll end up paying more tax, put the after-tax balances are going to be close. In fact, if the tax rates for contribution and withdrawal are all the same, then the after-tax balances will be EXACTLY THE SAME. That's not likely to happen, of course, but it is an important point to make.

The caveat is of course, you can't contribute $25,533 to the TSP in one year. And so in your example, Roth wins only because Traditional can't match it. But the conclusion is not that Roth is simply better. The conclusion is that spending more money on retirement is better.

Once you get below the contribution limit, then this equal comparison matters a lot more.

Tax brackets Now vs Retirement make or break this math. Not "my Roth earnings grow tax free". Doesn't matter.

[ArrieS]

My approach, for what it’s worth, is to maximize my Traditional TSP ($19,000 per annum) & maximize my ROTH ($7,000 per annum)...

Wait,

If you are contributing $7,000 to your ROTH IRA your also able to contribute an additional $6,500 to the TSP. So your TSP would be maxed at $26,000.

Of course this is all assuming your 50 and older and not just illegally over contributing to your ROTH IRA.

[Scorpio70]

I don't trust the Government to keep it's promise. I always took the instant tax break.

[repinda808]

My approach, for what it’s worth, is to maximize my Traditional TSP ($19,000 per annum) & maximize my ROTH ($7,000 per annum)...

Wait,

If you are contributing $7,000 to your ROTH IRA your also able to contribute an additional $6,500 to the TSP. So your TSP would be maxed at $26,000.

Of course this is all assuming your 50 and older and not just illegally over contributing to your ROTH IRA.

That's what I was thinking too. Unless the $7k is a typo...

[wingchaser]

I’m actually 59 1/2...

The ROTH IRA Max. just went to $7,000. Max. TSP just went to $19,500, with an additional Catch-Up of another $6,500, though I’m not there yet...

Moved entire TSP over to a Rollover IRA with Fidelity & also roll quarterly (as well), as I’m allowed four (4) In-Service Withdrawals per annum. I’d rather take control over my investment choices rather than be limited with what the TSP Board of Directors provide...

Best of Luck (everyone) in all you choose to endeavor!!!

[bloobs]

Wait,

If you are contributing $7,000 to your ROTH IRA your also able to contribute an additional $6,500 to the TSP. So your TSP would be maxed at $26,000.

Of course this is all assuming your 50 and older and not just illegally over contributing to your ROTH IRA.

my understanding is that it is not ILLEGAL in the prosecutorial sense to contribute over the 7k annual limit in your Roth--but that the IRS will make you pay taxes on your gains made with contributions made over that limit. Having said that, not sure how their auditors would calculate those amounts accurately.