Author Topic: Is Roth TSP right for me?  (Read 582 times)

ASW

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Is Roth TSP right for me?
« on: September 22, 2018, 07:52:50 AM »
Hey everyone,

I'm 10-15 years out from FIRE (net worth is approaching $100k).  Our (single income) household currently maxes husband and wife Roth IRAs, and will max our TSP contributions this year for the first time.  In retirement (mid-40s), I anticipate receiving an inflation-protected pension of about $65k a year (in future dollars).  After reading a few articles indicating that traditional plans are better than Roths for most people, I've been contributing to the traditional TSP option. 

However:

- I don't pay state income tax
- Only 2/3 of my income is taxable to begin with (due to BAH/BAS deductions)
- I have three kids so I get further tax credits

The result of all this is that my tax burden seems quite low.  My finances have changed so much this year that I don't actually know what my taxes will be.  In the past, I've received tax refunds of ~$10k, so I reduced my withholding quite a bit.  I think my taxable income this year will be around $80k.  In retirement, my pension will fill up most of my low marginal-rate tax bracket, but obviously this depends on what the tax code will be more than a decade down the road. 

My intuition is that I should be contributing to the Roth TSP, but since that goes against the conventional wisdom, I was hoping to get some affirmation from you smart people that I'm not missing something in my analysis.

Thanks in advance!

terran

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Re: Is Roth TSP right for me?
« Reply #1 on: September 22, 2018, 09:00:04 AM »
With no state income tax, some of your current income not being taxed and a future pension it seems likely that you're one of the few Roth makes more sense for. It's all about current vs future expected marginal tax rates, so what are yours?

ASW

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Re: Is Roth TSP right for me?
« Reply #2 on: September 22, 2018, 10:29:58 AM »
I don't know enough about tax law to feel 100% confident about my marginal tax rate, but I'm trying to learn.  My total income is ~$110k, of which about $75 is taxable.  I got some extra income relating to a move this year, but I'm not sure if it is taxable or not.  The standard deduction is $24k, which I think brings me down to ~$50k of taxable income.  I'm hoping this means all of my taxable income should be in the 12% bracket. 

If the current tax code is still in place when I retire, I think my pension will come close to filling the 12% bracket, and my investment income will thus be taxed at 22%.

No matter what, it seems unlikely that my investment income will be taxed at less than 12% in retirement, so I'm thinking I should do all Roth for IRAs and TSP.

MDM

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Re: Is Roth TSP right for me?
« Reply #3 on: September 22, 2018, 10:35:49 AM »
...traditional plans are better than Roths for most people...

My intuition is that I should be contributing to the Roth TSP, but since that goes against the conventional wisdom....
Conventional wisdom also includes Most TSP Participants Should Switch To the Roth TSP.

Note the word "most" in both the suggestion to use traditional and the suggestion to use Roth.  As terran noted, you really have to look at your specific situation.  Do you know how to calculate/estimate your marginal tax rate both now and in retirement?

ETA: noticed your "don't know enough about tax law to feel 100% confident about my marginal tax rate" while writing this.  In that case take a look at Investment Order for a procedure and perhaps make use of the case study spreadsheet (or another tax calculation package you prefer) to help.


ASW

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Re: Is Roth TSP right for me?
« Reply #4 on: September 22, 2018, 10:59:41 AM »
@MDM Thanks for the article - it confirmed what I was thinking about the effect of my pension.  I'm going to switch my contributions to the Roth TSP. 

Cheers!

FatFI2025

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Re: Is Roth TSP right for me?
« Reply #5 on: September 23, 2018, 02:07:31 PM »
Yep, I think you're looking at it the right way. BAH being tax-exempt + no state tax is magic -- most active duty folks don't realize this until after they've punched out and their "higher" civilian salary is delivered with puny little checks. Without even knowing exact numbers, you do sound like the rare case where Roth is a better way to go.

Dragonswan

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Re: Is Roth TSP right for me?
« Reply #6 on: September 24, 2018, 09:31:06 AM »
And remember - the current tax structure expires in 2025 and will revert to the old brackets if Congress doesn't extend it or enact something else.  So we don't know what the tax situation will be in the future, but we do know they're "on sale" now; contributing to Roth until something significant changes is the way to go.