Should I max out TSP?

[tk2356]

Hi all,

Is it always smart to max out your TSP? Even if it’s the middle years that are concerning? I’m hoping to be FIRE by 2030 (I’ll be 43 then), and thanks to IRA investments and a pension, I’m confident about being financially secure from 58 and on. I am worried, though, that if I max out the TSP + IRA then I won’t be covered as well from age 43-58.

I can’t wrap my mind around a Roth backdoor conversions, but am aware that I can withdraw the principle of the Roth during that time. Does that mean that I should take advantage of the TSP tax advantage now and rely on Roth principle + taxed accounts to get through those years, while saving the TSP for 62+?

DW and I are in a very high income tax state and locality (NYC), if that makes a difference one way or the other for TSP contributions/conversions. Thanks!

[terran]

Yes, you should max the TSP. Doesn't the TSP have a Roth option? At least do that.

Perhaps you should work on wrapping your head around Roth conversions. It's not that hard, and then you only need to cover from 43-48 with Roth principle and taxable before the conversions are accessible.

[tk2356]

Yes it does have a Roth option — I’ll do that! I assumed traditional would be better to lower state taxes for the time being, but, with the bridging concern, I think you’re right. I just had to hear it from someone else I guess for it to click. Thanks for the help!

[terran]

Don't misunderstand me, Roth is better than not maxing it out, but traditional is likely better than Roth. If you can get over your fear of Roth conversions to access money in traditional I would almost certainly do traditional.

[Philociraptor]

Here's some reading that might help too.

[kendallf]

Until this year, the TSP Roth option wasn't very useful for scenarios such as this as you were forced to take withdrawals in proportion to your Conventional/Roth balance.  That's going away on Sept. 15th though, when the TSP will get much more flexible withdrawal rules like most 401(k)s.

If you can max out the traditional TSP and save additional amounts in Roth IRA or just a taxable account, that'd be your best option.  Take all of the tax benefit you can now.  If you're planning to quit in ~10 years, I assume you're saving a high percentage of your salary now.  Do you have an HSA?  See Madfientist's site (link above) for more on why the HSA is a great option as well.  For Federal employees your contributions are also exempt from FICA taxes, and it's potentially tax exempt (not just tax deferred).

[insufFIcientfunds]

I'd max it out. As noted above the withdrawal options are only getting better. The fees are stupid cheap.

If you are a FERS employee and vested, you'll have a little pension when you hit your MRA too. Not that it helps in the gap years, but getting to use/lose and selling all your AL when you seperate (since you won't actually be "retiring") is a nice bump when you first leave.

Not sure about your grade/rank but going to a part time GS employee in a lower COL area has been super awesome for some friends of mine. Creep into retirement...

[tk2356]

Wow. I really wish I’d been doing this over the last ten years while on active duty. Better late than never I guess. I’ll max the traditional TSP, but unfortunately have tricare reserve select health insurance so am ineligible for the HSA. @Philociraptor, that link is gold — thank you (and the others) for the advice.

[Dragonswan]

You should max your TSP.  Whether or not you do Roth or Traditional contributions depends on where you intend to live in retirement.  I'm a huge fan of Roth but this is one of those times that could be an exception. If you intend to live in NYS, remember that NYS does not tax federal or NYS pensions.  They do not tax social security.  After you reach 65, they have a reduced property tax bracket you fall into. So you'll only pay state taxes on the TSP withdrawals. So if you plan to stay in NYS you are better off doing traditional now (especially since you also have a city income tax) and paying very little taxes later.  If you plan to move to an area that is less friendly tax wise to pensions and social security, then you might be better off doing Roth now.  That way at least your TSP is free of state taxes (although it still might be better to go traditional since the city and state tax will be higher in NYS than almost any state tax in retirement).

[six-car-habit]

  **I am worried, though, that if I max out the TSP + IRA then I won’t be covered as well from age 43-58.**

Ummm, this is the crux of the problem. If you max the TSP/ IRA you'll not be able to get at that money [ without penalties] until mid 50's age.

 if you retire at 43 , you get say 23% of your base salary [ assuming working since 20 ] at minimum retirement age, about 57.5 years old , in pension. Before taxes.

Can you save enough in non- IRA, non- TSP , investment vehicles in the next 11 years, to support all your expected expenses for 15years ?? - until pension and non penalty TSP/ IRA is available.  I think a lot of this depends on your housing costs and spouse income, will she keep working, etc ?

 Might be a better question for the case study page.

[Villanelle]

Are you military or a government employee, and if the former, are you BRS or old retirement system?

[tk2356]

@Villanelle, I’m a military Reservist and opted into the BRS system (at the time I wasn’t sure if I’d stay in for 20 years).

 @six-car-habit, I won’t be able to collect the military pension until I’m 58 due to being a Reservist. Retirement age is usually 60, but I did one year on orders - reducing that to 59 - and will likely do another next year. I think if I put all of my reserve income (~$18k) into the TSP, then max out our Roth IRAs for another eleven years (thirteen for DW), the Roth principle + taxable investments will be enough to tide us over until we can access converted funds. Our income will disqualify us from the full traditional IRA deduction, so this seems like the best path for us.

@Dragonswan, thank you for the response. We intend to stay in NY (or move back to Belgium for a while), so will go the traditional TSP route. I was pleasantly surprised to see that NYC is a friendly-ish place for retirees, so will be happy to take advantage of the tax-deferred options now.

[Villanelle]

@Villanelle, I’m a military Reservist and opted into the BRS system (at the time I wasn’t sure if I’d stay in for 20 years).

 @six-car-habit, I won’t be able to collect the military pension until I’m 58 due to being a Reservist. Retirement age is usually 60, but I did one year on orders - reducing that to 59 - and will likely do another next year. I think if I put all of my reserve income (~$18k) into the TSP, then max out our Roth IRAs for another eleven years (thirteen for DW), the Roth principle + taxable investments will be enough to tide us over until we can access converted funds. Our income will disqualify us from the full traditional IRA deduction, so this seems like the best path for us.

@Dragonswan, thank you for the response. We intend to stay in NY (or move back to Belgium for a while), so will go the traditional TSP route. I was pleasantly surprised to see that NYC is a friendly-ish place for retirees, so will be happy to take advantage of the tax-deferred options now.

If you haven't already, I strongly recommend you check out @Nords many posts here and his very valuable website.  He's the pro on military finances. 

[tk2356]

Very good to know! I’ll check them out now.

[Nords]

If you haven't already, I strongly recommend you check out @Nords many posts here and his very valuable website.  He's the pro on military finances.

Thanks for the tag, Villanelle!

Is it always smart to max out your TSP?

Generally, it’s smart to maximize your TSP contributions...

I’ll max the traditional TSP,but unfortunately have tricare reserve select health insurance...

... however if you’re in the Guard or Reserves, and if your civilian employer has a higher match than the DoD BRS 5% agency/matching contributions, then it may be better to contribute to your 401(k). 

Your elective deferral limit is tracked by Social Security Number.  It’s a total (of $19K in 2019) spread among the traditional TSP, the Roth TSP, the traditional 401(k), and the Roth 401(k).
See the third and fourth footnotes below this TSP contribution table:
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html

Even if it’s the middle years that are concerning?

That’s always a “Yes”.  There are many ways to tap your retirement accounts before age 59.5, with no penalties and possibly even without income taxes.  In addition to the Mad FIentist link from Philociraptor, here’s the big list for the TSP:
https://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

Contribute as much as you can to your TSP (subject to your employer 401(k) benefits) and don’t worry about bridging the gap.

A high savings rate means that when you maximize your 401(k)/TSP contributions, and maximize your IRA contributions, and save even more in taxable accounts... then you’ll have enough to bridge the gap.

Our income will disqualify us from the full traditional IRA deduction, so this seems like the best path for us.

If you can’t take a deduction for a traditional IRA contribution then use the traditional TSP (and your traditional 401(k) if applicable) and then contribute to your Roth IRAs.

I can’t wrap my mind around a Roth backdoor conversions, but am aware that I can withdraw the principle of the Roth during that time. Does that mean that I should take advantage of the TSP tax advantage now and rely on Roth principle + taxed accounts to get through those years, while saving the TSP for 62+?

From your description (and possibly garbled vocabulary) I’d suggest reading the Mad FIentist link, and The-Military-Guide link, and then asking more questions here.  If confusion persists then you can always consult a fee-only CFP or CPA to create a plan.

For decisions on Roth IRA conversions you essentially have to guess your income-tax brackets for the years:
- after you reach FI and stop working for earned income (age ~43?),
- after any pensions start (in your case, at age ~58),
- after age 70.5 with Required Minimum Distributions and Social Security.

If you’re in a high income-tax bracket now (NY) then it might make more sense to contribute to your traditional TSP and traditional IRAs now.  (Subject to the income limit on a deduction for a traditional IRA contribution.)  At age 43 (when your earned income drops off) you could start converting your traditional IRA to a Roth IRA (in annual increments at lower income-tax brackets).  When you’ve finished those conversions then you could roll your traditional TSP over to a traditional IRA and start that Roth IRA conversion process.

You’ll live off your taxable investment accounts and your Roth IRA contributions while you’re filling the pipeline with Roth IRA conversions.  When you start your military pension at age 58 then you don’t even have to worry about reaching the age 59.5 threshold for penalty-free distributions.  If you’ve converted your traditional TSP and traditional IRA accounts to Roth IRAs before you reach age 70.5 then you won’t have to worry about RMDs or additional taxation above your Social Security distributions.

My spouse and I spent 16 years on our Roth IRA conversion project while living off our taxable income/investments.  (We also paid the income taxes on the Roth IRA conversions out of our taxable accounts.)  During our working years (at higher income-tax brackets) we contributed to traditional accounts, and we converted during our FI years (at much lower income-tax brackets). 

Now that I’m only nine months away from age 59.5, that seemed to happen awfully quickly.  We also never needed to tap our Roth IRA contributions or the amounts of the conversions.  We’ll never have to worry about RMDs, either.

... while saving the TSP for 62+?

I’m not sure what age 62+ has to do with the TSP or IRAs or any other investment accounts.

[tk2356]

Can’t thank you enough, @Nords! I did indeed garble both vocab and the penalty-free withdrawal age for the TSP. Thanks to the above links/info and from poking around this site some more, I feel much more informed and confident with our retirement plan.

Oddly enough, a 1Lt asked my advice on her TSP allocation today. She was putting in 5% to get the match (she chose the BRS route), but chose the most conservative fund that was barely keeping up with inflation. I told her what I wish I had done at her age... max out the TSP in a more aggressive fund + the IRA. She ran her numbers, made the switch and will remember that moment fondly I’m sure in 10+ years.