Author Topic: Case Study. Should the Fed go Roth or Trad TSP?  (Read 1735 times)

tharidumuf

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Case Study. Should the Fed go Roth or Trad TSP?
« on: October 15, 2016, 03:23:16 PM »
I would like to start by stating I have spent quite a bit of time researching my question but I am still struggling to find an answer that is satisfying.

Me: Age 30.  Federal Employee, health care professional.  I can retire after 20 years (age 50) but mandatory in 27 (age 57).  Iíll have a ~$40,000 pension.  I currently make $71,000/year but Iíll make around $110,000-$120,000 by the time I retire.  I have a professional background and will likely continue to work for at least another 10 or so years full-time after retiring from my federal position.  I enjoy what I do and being completely retired while my spouse is still working will probably not work well for me.

Spouse: Age 28.  Teacher Making $45,000 year.  She will likely retire in 30-35 years with a final salary of $84,000.   Sheíll receive a pension of ~$40,000.

Currently, we both work a single full-time job ($116,000 combined, 25% tax bracket).  I may begin doing some private practice things on the side in the near future. 

Current expenses:
$183,000 mortgage, no other debt.  30 year, 3.5%. interest.  We have 29 years left to go.
Student loan debt is significant but will be paid off entirely in 10 years if I stay with my employer.
Currently have a fully funded emergency fund
No other debt

In short:
Current income = $116,000
Income in 15 years = $110,000 (me) + $60,000 (spouse) = $170,000, plus whatever additional income I make part-time in private practice.
In 20 years = $40,000 pension (me, retired Fed), $70,000 (wifeís salary) (total = $110,000), plus what additional income I decide to bring in
In 30-35 years = $80,000 pension (wife and I both retired), plus whatever additional income I decide to bring in
*None of these amounts consider the money we would withdrawal from our retirement accounts.

We currently contribute 30% of our income to retirement accounts My wife is currently contributing to her 403b.  She does not receive a match.  I am contributing to a traditional TSP and receive a 5% match (which will be about $100,000 in contributions over the course of my career).

Here is my question.  Given the above-mentioned information, my primary question is should I be maxing out my Roth TSP or my traditional TSP? 

I also would like to hear opinions regarding what my investment priories should be for various retirement vehicles (e.g., IRA, Roth IRA, 403b, trad TSP, Roth TSP, HSA)?

Thank you in advance.

JLee

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Re: Case Study. Should the Fed go Roth or Trad TSP?
« Reply #1 on: October 15, 2016, 03:44:25 PM »
For what it's worth, a savings rate of 30% will let you retire at your current expense load in 28 years.  You'll have a pension then as well, so you could both easily retire without relying on any pension funding at all.

I'd do the math on cashing out pensions and retiring early. ;)

Catbert

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Re: Case Study. Should the Fed go Roth or Trad TSP?
« Reply #2 on: October 15, 2016, 04:07:07 PM »
My general rule woulds be to go traditional TSP is you're in the 25% or higher Fed tax bracket.  But that presupposed that you will be in the same or lower tax bracket when withdrawing. 

MDM

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Re: Case Study. Should the Fed go Roth or Trad TSP?
« Reply #3 on: October 15, 2016, 05:58:52 PM »
You should estimate your withdrawal marginal rate, using today's tax brackets and real (not inflation-adjusted) expected salary and pension income.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth for more.  If you get 25% or higher (and assuming 25% is your current marginal savings rate), go Roth.

See also https://thefinancebuff.com/most-tsp-participiants-should-switch-to-the-roth-tsp.html, in which the author makes a generic estimate that your pensions will be high enough that most of your current savings should be Roth.

Re: "investment priories should be for various retirement vehicles (e.g., IRA, Roth IRA, 403b, trad TSP, Roth TSP, HSA)" - see the 'Investment Order' tab in the case study spreadsheet.
« Last Edit: October 15, 2016, 06:00:32 PM by MDM »

tharidumuf

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Re: Case Study. Should the Fed go Roth or Trad TSP?
« Reply #4 on: October 15, 2016, 07:51:36 PM »

For what it's worth, a savings rate of 30% will let you retire at your current expense load in 28 years.  You'll have a pension then as well, so you could both easily retire without relying on any pension funding at all.

I'd do the math on cashing out pensions and retiring early. ;)

I've been trying to convert my spouse but I haven't been effective. She loves her job and she would stay there forever if she could.


You should estimate your withdrawal marginal rate, using today's tax brackets and real (not inflation-adjusted) expected salary and pension income.  See https://www.bogleheads.org/wiki/Traditional_versus_Roth for more.  If you get 25% or higher (and assuming 25% is your current marginal savings rate), go Roth.

See also https://thefinancebuff.com/most-tsp-participiants-should-switch-to-the-roth-tsp.html, in which the author makes a generic estimate that your pensions will be high enough that most of your current savings should be Roth.

Re: "investment priories should be for various retirement vehicles (e.g., IRA, Roth IRA, 403b, trad TSP, Roth TSP, HSA)" - see the 'Investment Order' tab in the case study spreadsheet.

Unless I'm doing a lot of private practice work in my free time during retirement, it looks like our estimated tax rate will be 25%. While we're currently in the 25% tax bracket, our household income will eventually put us in the 28% bracket before we retire. Wouldn't this information suggest we should go the trad TSP route? One thing that I'm stuck on is this-we may be just fine living most years on our pensions alone. With that being said, required minimum distributions would be very inconvenient.

Still looking for all the insight you and others can provide. This question, Roth or Trad TSP, seems like it shouldn't be so difficult.

MDM

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Re: Case Study. Should the Fed go Roth or Trad TSP?
« Reply #5 on: October 15, 2016, 08:40:12 PM »
...it looks like our estimated tax rate will be 25%.
Ok, assuming this is true without any withdrawals from traditional accounts...

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While we're currently in the 25% tax bracket
...you should use Roth, especially if you maximize your contributions.

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our household income will eventually put us in the 28% bracket
...at which time you could use traditional.

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This question, Roth or Trad TSP, seems like it shouldn't be so difficult.
Itís Difficult to Make Predictions, Especially About the Future.  Note that if you decide to retire earlier, your pension(s) and tax rate may be lower, and traditional would have been better.