Just getting into a new tax bracket, could use some help optimizing investments

[johnsmithindustries]

I'm military, and just now getting into the 25% bracket. This year my taxable income will be $41,436, next year $51,746. If my understanding is correct, I can use the Traditional TSP (401K) to avoid it for a while, by reducing my taxable income to get back fully into the 15% bracket so that none of my income is taxed at 25%.

Here's the plan:
1) Contribute just enough to the traditional TSP to get back into the 15% bracket
2) Contribute remaining TSP money (up to the max $17,500) to Roth TSP, all taxed at 15%
3) Max out Roth IRA (again after being back in the 15% bracket)

Total estimated taxable income (base pay + flight pay)

In 2013:
$41,436.36 - $36,250 (25% bracket) = $5186.75 to Traditional TSP  -> $1296.68 tax savings for the year!
$17,500 (max TSP contributions) - $5186.75 = $12,313.25 contribution to Roth TSP =

Total estimates for 2014, probably will change with brackets, contribution limits, and pay increases for the new year:

$51,746.80 - $36,250 (25% bracket) = $15,496.80 to Traditional TSP -> $3874.20 tax savings for the year!
$17,500 (max annual TSP) - $15,496.80 = $2003.20 contribution to Roth TSP

I have more income than this, but it's tax-free allowances (roughly 30% of my pay). I plan on saving the rest for a house in the next year or so.

Does this pass the sanity check?

[curler]

At a first glance, this looks right, although I am certainly no expert.  One thing to keep in mind, since you plan on maxing out both your TSP and IRA is that the IRA allows more flexibility in the contributions.  (I am assuming here that the TSP is the same as a 401(k), I have no personal experience with the TSP).  With a 401(k), you have to declare how much of your paycheck you want contributed to a Roth and a traditional account, generally a paycheck or two cycles ahead.  You then have to remember to switch again to another contribution amount if you want to change.  You also can only contribute during the calendar year.  Alternatively, with the IRA, you can just make a single contribution, as a one-off payment, in the exact amount you want.  You have until April 15th to make the contribution or to recharacterize a Roth contribution as a traditional one (or vice versa).  So to the extent that you may not be able to predict your income to the dollar, making your TSP all tax deferred, and using the IRA to adjust the amount of tax deferred vs Roth, may be a little bit easier.

[johnsmithindustries]

At a first glance, this looks right, although I am certainly no expert.  One thing to keep in mind, since you plan on maxing out both your TSP and IRA is that the IRA allows more flexibility in the contributions.  (I am assuming here that the TSP is the same as a 401(k), I have no personal experience with the TSP).  With a 401(k), you have to declare how much of your paycheck you want contributed to a Roth and a traditional account, generally a paycheck or two cycles ahead.  You then have to remember to switch again to another contribution amount if you want to change.  You also can only contribute during the calendar year.  Alternatively, with the IRA, you can just make a single contribution, as a one-off payment, in the exact amount you want.  You have until April 15th to make the contribution or to recharacterize a Roth contribution as a traditional one (or vice versa).  So to the extent that you may not be able to predict your income to the dollar, making your TSP all tax deferred, and using the IRA to adjust the amount of tax deferred vs Roth, may be a little bit easier.

Yeah, my plan was to calculate a monthly % that would at give me just over what was necessary to contribute to the Traditional over the course of the year so I can sort of set it and forget it. For the Roth TSP, you can select dollar amounts to contribute so that's much easier. I do wish both were like that!

[Nords]

That all sounds good.

Your math would change if you deployed to a combat zone and started receiving tax-free pay.  (Of course you'd be in a combat zone and receiving tax-free pay, so tax planning would plummet to the bottom of my priority list.)  In this situation you'd probably want to try to max the $51K total TSP limit and consider the Savings Deposit Program as well.

Aside from combat-- there anything else that you can contribute to the TSP above the $17,500 limit, like those big honkin' (just kidding) aviator bonus contracts or re-enlistment bonuses?  I've always heard rumors of those incentives but have yet to sight one in the field.

When the TSP was first expanded for military, the contributions were limited by percentages of pay instead of dollar amounts.  I suspect the TSP has a huge investment of computer equipment in that system and would be slow to change over to dollar amounts. 

[Crash87]

Looks good to me, but you may want to figure out how much tax you'll be paying when you're retired. It might be more efficient to go all traditional.