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.