Author Topic: TSP Roth - is there an advantage over other investments?  (Read 3415 times)

horsepoor

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TSP Roth - is there an advantage over other investments?
« on: January 31, 2014, 11:06:39 AM »
Federal employee here - I've been contributing to my TSP retirement account since starting my career, but have never heard much about the TSP Roth option. No one talks about it, and it's really not been an issue for me since I haven't been maxing out my TSP. I was looking at it this morning though, and trying to figure out if there's an advantage to contributing to it instead of just opening some index fund accounts.  Obviously, it would be easier - I just go in and select an amount and it's pulled from my pay every two weeks post-tax. 

Assuming I would want to access this money before age 59.5, is there any advantage to putting money here vs. in some Vanguard accounts?  I'd like to set myself up to have the option to retire at age 50 should the opportunity present itself, but the income gap between age 50 and 57 is the biggest unknown, so I'm interested in building a stash that I could tap as needed if I can't support myself on consulting or other work during that time period.  The earnings on the Roth would be taxed when I withdraw them, so it seems that makes them equivalent to any other investment, correct?  I'm currently 36, so this is about a 14-year investment horizon, if that makes any difference.

MustachianAccountant

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Re: TSP Roth - is there an advantage over other investments?
« Reply #1 on: January 31, 2014, 11:13:23 AM »
You can contribute more to your TSP than you can to an IRA (which is what you'd be doing with a Vanguard account).
Plus, I believe that the TSP program has similar (if not lower) fees to Vanguard.
So definitely keep up with the TSP.
The Roth vs. "Traditional" decision is a bit more difficult, as there are many factors involved, and you'll get varying opinions.
Also more difficult is how to provide for the gap between "retirement" and being "retirement age" (where you can draw from your retirement accounts). Some will say Roth pipeline, others will simply recommend that you keep the money to cover the gap in a taxable account. Again, some factors are situational like your current age, and how much you'll need between retirement and retirement age.

horsepoor

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Re: TSP Roth - is there an advantage over other investments?
« Reply #2 on: January 31, 2014, 11:18:55 AM »
Thank you!  Just to be clear, I am going to continue to contribute to TSP, but just started figuring out what additional investments I need to make to provide more flexibility towards the end of my career.

MustachianAccountant

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Re: TSP Roth - is there an advantage over other investments?
« Reply #3 on: January 31, 2014, 11:24:03 AM »
Ahhhhh.... I see your question now.
You want to know if there are advantages to putting your money in a Roth vs. a taxed account when it comes to taking money out to fill the gap between "retirement" and "retirement age." Is that right?

I'd say, are your retirement accounts on track to provide for you once you're at retirement age? If yes, time to start saving for pre-retirement age retirement.
How much will you need to fill the gap? If you can get there with Roth contributions, I'd say do that.
If you'd need the contributions AND the earnings to fill the gap, you'll be going taxable.

I may be oversimplifying. Might want to check in the investing forums as well.

horsepoor

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Re: TSP Roth - is there an advantage over other investments?
« Reply #4 on: January 31, 2014, 11:33:08 AM »
Yep, thanks for phrasing that better than I did!

Yes, I'm on track for having "enough" at retirement age with my pension taken into account.  Looks like firing up the Roth is the way to go at this point.

Nords

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Re: TSP Roth - is there an advantage over other investments?
« Reply #5 on: February 02, 2014, 07:50:25 AM »
Assuming I would want to access this money before age 59.5, is there any advantage to putting money here vs. in some Vanguard accounts?  I'd like to set myself up to have the option to retire at age 50 should the opportunity present itself, but the income gap between age 50 and 57 is the biggest unknown, so I'm interested in building a stash that I could tap as needed if I can't support myself on consulting or other work during that time period.  The earnings on the Roth would be taxed when I withdraw them, so it seems that makes them equivalent to any other investment, correct?  I'm currently 36, so this is about a 14-year investment horizon, if that makes any difference.
The TSP has some of the nation's lowest expense ratios (less than half of Vanguard's cheapest) and the unique "G" fund.  You also have the option of withdrawing your traditional TSP funds as an annuity in retirement, and hypothetically the federal government can get a better deal on an annuity than us retail investors.  The TSP is also a limited opportunity-- once you leave the federal civil service (or the military) then you can't make any further contributions to the TSP.

The difference between the TSP and the Roth TSP is your tax bracket.  If you're in a very high tax bracket now, then the TSP allows you to shelter money now (before taxes) and withdraw during retirement, when hopefully your tax bracket is lower.  But if you expect to have more income in retirement (RMDs, Social Security, pensions) then it's better to pay the taxes now and put the money in the Roth TSP.  The military advises its junior servicemembers to max out their Roth TSP contributions before putting more in the conventional TSP or Roth IRA, because they're probably in the lowest tax bracket that they'll ever see.

As you get within 5-7 years of financial independence, you'll be able to forecast your budget more closely and decide how much you need to withdraw each year to support that.  When you reach that date then you can stop investing in the TSP and pile up cash in taxable accounts, or you can start rolling over the TSP to an IRA and converting it to a Roth IRA, or the Roth TSP to a Roth IRA.  You can withdraw Roth IRA contributions at any time, which might cover most of the gap in your retirement expenses.  When you convert a conventional IRA to a Roth IRA, then after five tax years you can withdraw the amount of the conversion penalty-free. 

horsepoor

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Re: TSP Roth - is there an advantage over other investments?
« Reply #6 on: February 02, 2014, 08:38:08 AM »
Thank you so much for such a thoughtful reply!  My husband is also a federal employee, and even if we both max out our TSPs, we'll still be in the 25% tax bracket, currently.  However, sheltering 25% from tax would definitely be attractive, and we should be able to drop a tax bracket when we reach retirement age.  Factoring in pensions, we really don't NEED the amount of TSP we would accumulate if we max out those funds, but the amount of tax we're avoiding now should certainly be factored in. 

Since I started this thread I have initiated contributions to Roth.  It's great that at least some of the military is providing financial advice.  I've been with my agency almost 11 years, and really got nothing other than what I could elect to make TSP contributions, and that there is matching up to 5%.  I honestly wasn't really aware of the Roth option, much less what it was for, until now.  Kind of embarrassing, but true.  Some other employees in my agency have gone a few years before even knowing they could contribute to TSP, so there's a few years lost where all that's gone in is the 1% employee match.

simonsez

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Re: TSP Roth - is there an advantage over other investments?
« Reply #7 on: February 03, 2014, 11:51:50 AM »
I honestly wasn't really aware of the Roth option, much less what it was for, until now.  Kind of embarrassing, but true.  Some other employees in my agency have gone a few years before even knowing they could contribute to TSP, so there's a few years lost where all that's gone in is the 1% employee match.
Don't feel bad, every now and then you hear a statistic where something like ~10% of all TSP-eligible participants at a given point in time have never touched it after it was initially set up, which at my agency (maybe everywhere?) meant 3% in the G fund leaving matched money on the table.  Also there is that worse crowd where they stop all contributions to TSP altogether because they want their paychecks to be bigger or don't trust anything to do with the world of investing or the government itself (ironic!).

If you weren't aware of something related to the TSP, it is quite possible there would be worse things to have been in the dark about.  Roth TSP offers flexibility/hedging to be sure but outside of some select subpopulations, the utility tends to be a bit overblown.  But hey, that's not necessarily a bad thing.  If every government employee understood what the Roth TSP is and made the decision whether or not to incorporate it in their overall TSP strategy, that'd be very impressive across the board.

Ricksun

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Re: TSP Roth - is there an advantage over other investments?
« Reply #8 on: February 03, 2014, 01:22:17 PM »
Roth TSP has just rolled out in the last few years, depending on your Agency; Some got it sooner than others. 

Just to rehash what you hear above, TSP has incredibly low fees and the G fund (essentially a zero risk investment that earns more any other zero-risk options) makes it a very unique product that isnt available elsewhere.

One negative that I would mention is the fact that because of the super low fees that are paid, you also have less flexibility.  One area where this flexibilty will hurt you is in withdrawals.  When your fund has both ROTH as well as traditional funds, all withdrawals are done in the same proportion as the account balances.  So if you have 80% traditional TSP and 20% ROTH, you need to withdraw in that proportion.  Therefore, you're not able to do any advanced planning such as taking the maximum of traditional TSP before taxes kick in and the rest in ROTH which is tax free.

It also is the equivelant of a 401(k) so taking the ROTH principal out is not necessarily an option to fund pre-retirement activities.

However, you can regain this flexibility by rolling it all into a IRA after retirement, but you then no longer have access to the low fees and G fund.

RickSun