Author Topic: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?  (Read 3275 times)

MyCircus, MyMonkeys

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Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« on: March 23, 2016, 07:34:53 AM »
I've been following MMM for one year.  I posted a case study December 2014, and we were in very bad shape- behind on two mortgages, car payment, and two credit cards.  We've paid off about $25k in credit card debt over the last year, and traded in our clown car for a Corolla.  Today, we're about two months away from zero credit card debt, and I'm starting to formulate my next steps to FI.  I recognize having a car loan is not ideal, but I'm ready to focus on saving for retirement. I've done as much research as I can stand, and I believe I have a strategy.  However, I would like to get the opinions of like-minded folks on the MMM forum.  The background:

  1.  I am a federal government employee, with 14 years of service.
  2.  Married, with one 14 year old daughter.
  3.  2015 AGI was approximately $65k (in the 15% tax bracket).
  4.  My gross salary is about $80k.
  5.  Spouse's gross salary is $24k.
  6.  My current TSP balance is $40k, at a contribution level of 10% (my agency matches to either 5 or 6%)
  7.  Spouse's current 401k balance is $1500, at a contribution level of 6% (his company matches to 6%)
  8.  My current Roth TSP balance is 0
  9.  Spouse's current Roth IRA is zero.  I created one for him yesterday at Scottrade, but haven't funded yet.

Current debt:
         a.  $4,000 on a credit card with 15% interest (as I said, about 2.5 months till paid off!)
         b.  a car loan of $16k at 4.74% interest (4 year note, just started- we had a lot of negative equity from our previous clown car)
         c.  two mortgages: primary home ($274k note @ 3.75% and 30 years, balance of $250k); and rental home ($130k note @ 3.5% and 15 years, balance of $100k).

Regarding my daughter and college- right now, my fuzzy plan is (assuming she decides to go to college; I've told her the Navy, Air Force and Coast Guard are great options to grow up, get paid, and earn that GI Bill) is to pay (in cash) for two years at a community college, IF she agrees to live at home (saves me lots).  At that point, I hope to be in a better position to help her with the next 2 years.

Given the generics of my situation, in 2.5 months (when CC is paid off) my plan is:
   1.  Start contributing $289 a pay period to my Roth TSP (about $5200 by end of year)
   2.  Maintain contribution to my Traditional TSP at 10% (about $8300 by end of year).
   3.  Maintain spouse's contribution to his 401k at 6% (about $1500 by end of year).
I want to do these step from now until 12/31/16.  By then, the credit card will be paid off, and a very good chunk of the car as well (beginning double payments in 2.5 months; this will be at a slower pace than the credit card because I want to focus on retirement, and I think the car interest rate is low enough that this seems reasonable).

Starting FY2017, I want to change our focus a bit, and max out Roth's:
  1.  contribute $10k to Roth TSP, with remaining $8k going to traditional TSP (coming from my 5% contribution and agency match of 5%).
  2.  contribute $5500 to spouse's Roth IRA, and maintaining his 6% 401k contribution. Any raises he gets would go toward increasing his 401k contribution.

Does this make sense?  I believe I'm allowed to also open an additional Roth IRA for myself; is that true?  If so, I would then begin the process to fund $5500 a year into that. Sorry for the novel- I'm not sure what info you guys would need to make an informed opinion; so I threw most everything in.

« Last Edit: March 23, 2016, 08:13:59 AM by Nessie1014 »

Tjat

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Re: Beginning retirement saving: TSP, TSP Roth, Roth IRA?
« Reply #1 on: March 23, 2016, 08:05:00 AM »
This probably belongs on the Ask a Mustachian board as a case study, but I'll weigh in

1. Make sure you're maxing whatever employer match is available to you and your wife.

2. Confirm you have some sort of emergency fund. I mean a true emergency fund, so large enough that if your car breaks you don't incur more CC debt, but small enough that accumulating won't delay moving on to step 3.

3. Pay off your credit card debt ASAP. By this I mean that you should pay the minimum on all other debt (car loan and mortgage?) and divert all remaining resources to this balance. 15% interest is awful.

4. Follow (or determine) your investment allocation strategy. What are your short and long term goals? What's your risk tolerance? Answering these questions will determine your next steps, which will be along the lines of increasing your savings rate, cutting expenses (e.g. why do you need a 16k car loan?), contributing to pre/post/taxable investment accounts, stock/bond allocation, etc.



MyCircus, MyMonkeys

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #2 on: March 23, 2016, 08:14:27 AM »
Thanks Tjat; I've moved it over.

Ricksun

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #3 on: March 23, 2016, 09:02:43 AM »
  1.  contribute $10k to Roth TSP, with remaining $8k going to traditional TSP (coming from my 5% contribution and agency match of 5%).

I'm not sure if it just added that way itself and you already know this, but wanted to be clear, the $18,000 contribution maximum is just YOUR contribution limit.  The Agency 5% is on top of that, so your combined TSP contribution for the year can be in excess of $18,000.

My recommendations (assuming you paid off the CC already):
1. Continue to contribute to TSP/401(k) to the company match
2. Pay off car loan (this is nearly 5% guaranteed return)
3. Pay maximum into Traditional TSP/401(k) for each of you ($36,000)
4. Fund Roth IRA to maximum for each of you ($11,000)

As for the Roth/Traditional split, most people on MMM will tell you to maximize the tax savings now because if you can maintain a low living cost in retirement and don't need to pull out a lot each year, the taxes could become negligible, versus the 15% you'd pay now for ROTH contributions.  You can make your own determination based on your projections in retirement and what you think will happen to the US tax code when you're retired.

One other note: Beware the TSP withdrawal limitations.  TSP will ONLY make dispersements in the same proportion of the account balance.  if you have 80% Traditional TSP and 20% Roth TSP, you are unable to take a dispersement consisting of any other ratio.  I.e. you cannot take out $10,000 Roth (tax free) money without also taking out $40,000 Traditional (taxed).

RickSun

MyCircus, MyMonkeys

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #4 on: March 23, 2016, 09:15:50 AM »
  1.  contribute $10k to Roth TSP, with remaining $8k going to traditional TSP (coming from my 5% contribution and agency match of 5%).

I'm not sure if it just added that way itself and you already know this, but wanted to be clear, the $18,000 contribution maximum is just YOUR contribution limit.  The Agency 5% is on top of that, so your combined TSP contribution for the year can be in excess of $18,000.

RickSun

I always thought the $18k amount was total- my Roth and traditional contributions, plus the agency match. I will definitely verify this, and adjust my numbers!  I've also read about the withdrawal limitations; I am planning on converting the Roth TSP to a Roth IRA before I turn 69/70. Thank you!

MyCircus, MyMonkeys

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Re: Beginning retirement saving: TSP, TSP Roth, Roth IRA?
« Reply #5 on: March 23, 2016, 09:38:23 AM »
1. Make sure you're maxing whatever employer match is available to you and your wife.

2. Confirm you have some sort of emergency fund. I mean a true emergency fund, so large enough that if your car breaks you don't incur more CC debt, but small enough that accumulating won't delay moving on to step 3.

3. Pay off your credit card debt ASAP. By this I mean that you should pay the minimum on all other debt (car loan and mortgage?) and divert all remaining resources to this balance. 15% interest is awful.

4. Follow (or determine) your investment allocation strategy. What are your short and long term goals? What's your risk tolerance? Answering these questions will determine your next steps, which will be along the lines of increasing your savings rate, cutting expenses (e.g. why do you need a 16k car loan?), contributing to pre/post/taxable investment accounts, stock/bond allocation, etc.

Tjat, thanks for your input.  We are definitely meeting our max company/agency match. The credit card is our current focus (all other debts being paid minimums); and will be paid off in 2.5 months. Our emergency fund right now is $1000; do you think 1-3 months (of expenses) is a better option?  Both you and RickSun agree that we should aggressively pay off our car loan before increasing retirement savings.  We are planning on paying the car loan, just not aggressively- my current plan is to pay triple payments starting in 3 months; as opposed to quadruple payments (the funds for the planned triple payments comes from a portion of the amount currently being used for credit card payoff; remaining portion is what I want to use to increase retirement savings). 
« Last Edit: March 23, 2016, 09:40:06 AM by Nessie1014 »

zephyr911

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #6 on: March 23, 2016, 10:35:58 AM »
There's no point holding an e-fund while carrying a high-rate credit card balance. Pay that $1000 to the card, saving $12.50/mo. Use the card if you have an emergency.

SomedayStache

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #7 on: March 23, 2016, 10:45:36 AM »
There's no point holding an e-fund while carrying a high-rate credit card balance. Pay that $1000 to the card, saving $12.50/mo. Use the card if you have an emergency.

I think this is a valid point to consider.   

One thing that held me back from ever completely using up my cash efund was the fear that I would have an emergency that a credit card wouldn't be able to pay.  I can't pay my mortgage from a credit card for instance.  But I'm over here trying to think up more examples and nothing comes to mind.  What other items cannot be paid with a credit card?

MyCircus, MyMonkeys

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #8 on: March 23, 2016, 11:03:36 AM »
Zephyr and Someday, when I started the MMM approach, we were almost bankrupt- no savings, and far behind on everything. Logically, I agree with you both; but emotionally, I NEED a cash cushion. I'm very aware of my interest charges.  Based on the amount of debt we had (and still have), I elected to follow MMM's advice of relying on a credit line for emergency expenses; thus our emergency fund of $1k (and I look forward to counting my pennies when they come in every month too).  :)

Tyson

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #9 on: March 23, 2016, 11:15:24 AM »
There is nothing wrong with having a cash cushion.  Yes it's not optimal from a returns standpoint, but it is a great stepping stone toward feeling comfortable with your finances.  For me it was 3 months worth of my mortgage payments, when I first started.  Now that I've got all debt gone (except mortgage), and have been building my stache for a while, I'm more comfortable keeping less cash on hand.  But in the beginning, when you're just getting out of debt and you've been living on the knife edge of financial disaster, having cash savings is a really helpful thing to have.

MDM

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #10 on: March 23, 2016, 11:37:48 AM »
Does this make sense?  I believe I'm allowed to also open an additional Roth IRA for myself; is that true?  If so, I would then begin the process to fund $5500 a year into that. Sorry for the novel- I'm not sure what info you guys would need to make an informed opinion; so I threw most everything in.
As Ricksun noted, "As for the Roth/Traditional split, most people on MMM will tell you to maximize the tax savings now because if you can maintain a low living cost in retirement and don't need to pull out a lot each year, the taxes could become negligible, versus the 15% you'd pay now for ROTH contributions.  You can make your own determination based on your projections in retirement and what you think will happen to the US tax code when you're retired."

There could be perfectly good reasons for your Roth/traditional split, but for most people in most years the best approach is all of one or the other.  How did you decide on the split you are using?

MyCircus, MyMonkeys

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #11 on: March 23, 2016, 01:26:33 PM »
"The knife edge of financial disaster" succinctly describes how I've felt for the past few years!

As for how I decided on the Roth/Traditional split I suggested, I relied on my bottom line (take home). I've been contributing 14% of my gross pay to my tax-deferred TSP; so I duplicated my paystub in a spreadsheet and calculated the largest amount I could afford to contribute to Roth TSP, and revised (downward) my percentage of contribution to tax-deferred TSP, until my take-home amount was still the same (I included annual computations as well, to ensure my AGI stays below $75k).

As for why I decided on the Roth/Traditional split: that's sort of a longer discussion.  There are still holes in my budget. I'm trying to get my family on the same page, but it's definitely a process.  My "budget" process so far is this: payday comes in, I pay minimums on all required bills.  Whatever remains, less $100, goes to the credit card (the $100 is for gas, cigarettes, unexpected expenses).  If I accidentally leave additional money available (for whatever reason), suddenly we are ordering pizza multiple times, going to a movie, going to 7-11 for candy bars, etc.  I know we shouldn't do these things.  But I hate always being the one to say no, and sometimes I give in.  Its really, really hard to downgrade a lifestyle, when the family doesn't agree that there is a need to do so. The spouse definitely agrees we need to pay off the credit card, and he is sort of on-board with an older car. He didn't think we needed to cut off cable; did agree to switching to a cheaper internet provider; but has been resistant to switching to Republic Wireless.  He definitely doesn't think we need to move into a smaller, cheaper house.  This reads like I'm blaming my spouse, but I'm not trying to.  I understand his desire to live a "middle class" life. He and I grew up with single mothers, basically on food stamps.  In his mind, I believe he thinks since we can pay all our bills plus extra on the credit card, then we are better off than our parents; therefore, no need for further change. As someone who knows how very little we have saved for retirement (at 37, no less), I'm way more concerned with retiring on-time, much less early.

I struggle with these decisions all the time, and I regularly still allow stupid expenses to happen.

Tyson

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #12 on: March 23, 2016, 03:23:14 PM »
I totally get what you are saying about not wanting to be the one to say no.  I don't either.  2 things helped me with this - first I would just buy treats in bulk at Costco or Sprouts (i.e., the grocery store) and I'd keep them at home.  So when someone wanted a treat, we didn't have to spend any extra.  Same goes for pizzas - I buy frozen pizzas and keep extra ingredients around so we can top them ourselves (fresh tomatoes and avocados have become recent favorites). 

Second, we give our daughter money to spend how she likes.  If she wants an extra treat, that is exactly what her $$ is for.  But when it's gone, it's gone.  This also helps teach her to be more considerate with her purchases.

And CONGRATS on the improvements you've made so far.  Things are not perfect (obviously), but they are MUCH MUCH better than they were.
« Last Edit: March 23, 2016, 03:25:57 PM by tyort1 »

Tyson

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #13 on: March 23, 2016, 03:30:26 PM »
Oh, one other thing that helps us with the whole "saying no" problem is you don't want to become a 'do nothing' family because that is no fun.  So we just switched from doing things together that cost money, to doing things together that are free.  I live in Denver and they have a useful website listing free events occurring in town - http://www.denver.org/events/free-denver-events/ - maybe your town has something similar?  Or check the newspapers for stuff like that, too.

MDM

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Re: Case Study: Proper mix of TSP, TSP Roth, Roth IRA?
« Reply #14 on: March 23, 2016, 03:54:29 PM »
"The knife edge of financial disaster" succinctly describes how I've felt for the past few years!

As for how I decided on the Roth/Traditional split I suggested, I relied on my bottom line (take home). I've been contributing 14% of my gross pay to my tax-deferred TSP; so I duplicated my paystub in a spreadsheet and calculated the largest amount I could afford to contribute to Roth TSP, and revised (downward) my percentage of contribution to tax-deferred TSP, until my take-home amount was still the same (I included annual computations as well, to ensure my AGI stays below $75k).

As for why I decided on the Roth/Traditional split: that's sort of a longer discussion.
...
I struggle with these decisions all the time, and I regularly still allow stupid expenses to happen.

Understanding where your money is going is an important puzzle piece that seems to be missing.  You might consider Quicken/Mint/YNAB/etc. to help with this.

After you pay off the CC debt, ignoring the rental completely (is that going well?), and assuming minimum payments on the car and mortgage, it appears (based on a quick pass through the case study spreadsheet) you could put $11K/yr into tIRAs, $25K/yr into TSP/401k, and still have ~$36K/yr for all other expenses.

Does that look feasible to you?  You might download and enter your own numbers for comparison.

Assuming $36K/yr expenses, you would likely be in the 10% bracket in retirement so traditional accounts today, while you are in the 15% bracket, seem better than Roth for you - at least for retirement purposes.