Author Topic: TSP/Guard  (Read 7246 times)

Workinghard

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TSP/Guard
« on: July 01, 2014, 11:34:29 AM »
I have a question for Nords and other military people. I'm still coaching my 21 year old with finances. He recently got a civilian job that's pays ~91k with base, bonus, insurance buy back. He will max out the equivalent 401k plan even though there's no company match--one of the reasons they give a bonus. He's also going to max out a Roth IRA.

He also has guard duty once a month and gets paid for that. I have no idea about the investment options available through the TSP. Based on the above, what would be the best place to put his guard money. I imagine he will just contribute the full amount as he will still have plenty left over to save for a home.  He's planning on renting for 3 to 5 years.

yandz

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Re: TSP/Guard
« Reply #1 on: July 01, 2014, 12:36:22 PM »
My hubby is guard and said the TSP actually falls under the same "bucket" as his 401k - so he can only contribute $17500 across both, so figure out how to best allocate - if TSP expense ratios are better, etc. then contribute all guard pay and then less to company 401k.


Catbert

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Re: TSP/Guard
« Reply #2 on: July 01, 2014, 12:59:03 PM »
TSP is the governments form of a 401k.  Your son can put up to 17.5K yearly...not to exceed his salary from guard duty.  TSP has basic index funds and the absolute lowest expense ratios compared to any fund families - even beats Vanguard.  I'd start with the C Fund (S&P 500).

My suggestion is to put as much money as he can in TSP.  Put money in his regular job's 401k only up to the match.

davisgang90

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Re: TSP/Guard
« Reply #3 on: July 01, 2014, 01:38:49 PM »
I agree with Mary, every penny he can to TSP then the rest of 17,500 to his 401k.  Congrats on raising such a smart son!

Workinghard

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Re: TSP/Guard
« Reply #4 on: July 01, 2014, 04:36:58 PM »
I wondered about both the TSP and 401k  being considered in regards to the max 17,500 contribution allowed. Thanks for clarifying that. I'll let him know. Since he'll be contributing with two different employers, he'll have to keep track to make sure he doesn't go over the limit. Not sure what happens if he did go over...


DollarBill

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Re: TSP/Guard
« Reply #5 on: July 01, 2014, 08:23:39 PM »
TSP is the governments form of a 401k.  Your son can put up to 17.5K yearly...not to exceed his salary from guard duty.  TSP has basic index funds and the absolute lowest expense ratios compared to any fund families - even beats Vanguard.  I'd start with the C Fund (S&P 500).

My suggestion is to put as much money as he can in TSP.  Put money in his regular job's 401k only up to the match.
I agree with this too and they also have the roth TSP=good choice!

kimmarg

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Re: TSP/Guard
« Reply #6 on: July 01, 2014, 10:18:14 PM »
Yea TSP has really low expenses. When I first found out about expense ratios I went to look it up and thought I had done something wrong because the decimal was in the 'wrong' spot! Nope, it's just that much cheaper!

They also have target date funds if he wants to put it in L2050 and forget it.

Janie

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Re: TSP/Guard
« Reply #7 on: July 02, 2014, 01:47:20 AM »
Quote
Not sure what happens if he did go over...

From the IRS:

Retirement Topics - What Happens When an Employee has Elective Deferrals in Excess of the Limits?

If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).
Excess withdrawn by April 15. If the employee withdraws the excess deferral by April 15, the withdrawn amount is not reported again as part of the employee’s gross income for the year. Any income earned on the withdrawal is reported as gross income for the tax year in which it is withdrawn. The distribution is not subject to the additional 10% tax on early distributions.

Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---What-Happens-When-an-Employee-has-Elective-Deferrals-in-Excess-of-the-Limits%3F

Workinghard

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Re: TSP/Guard
« Reply #8 on: July 02, 2014, 03:50:31 AM »
If he is already contributing to a Roth IRA will that conflict with the RoTh TSP? Will he be limited on the maximum amount in both like with his 401(k)?

TSP is the governments form of a 401k.  Your son can put up to 17.5K yearly...not to exceed his salary from guard duty.  TSP has basic index funds and the absolute lowest expense ratios compared to any fund families - even beats Vanguard.  I'd start with the C Fund (S&P 500).

My suggestion is to put as much money as he can in TSP.  Put money in his regular job's 401k only up to the match.
I agree with this too and they also have the roth TSP=good choice!

Workinghard

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Re: TSP/Guard
« Reply #9 on: July 02, 2014, 03:52:11 AM »
Janie, thank you for looking up something that I could have and should have done myself. I really appreciate it! I will share the above information with him and send the IRS information to him.

Workinghard

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Re: TSP/Guard
« Reply #10 on: July 02, 2014, 04:14:10 AM »
I looked at your blog and saw that you have a 10 year old or at least you did when that post was written. Launching years can be stressful, but it's exciting when you see them making good choices knowing that the lessons you have hammered in for years are bearing fruit.

It took us years to max out on retirement savings. He went from 12K a year to 32K to 91K. He was only at the 32K job a few months. It's wonderful that he can max out and not even miss the income and still enjoy being young. His future wife is not use to living on much either. Last year when he started dating her, he commented that her parents were grossly negligent because they did not teach her about finances. Lol. You have a good start on teaching your son!

I agree with Mary, every penny he can to TSP then the rest of 17,500 to his 401k.  Congrats on raising such a smart son!

Nords

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Re: TSP/Guard
« Reply #11 on: July 04, 2014, 11:57:20 PM »
I have a question for Nords and other military people. I'm still coaching my 21 year old with finances.
Hunh.  We're doing the same thing with our 21-year-old.  It's going well.

He also has guard duty once a month and gets paid for that. I have no idea about the investment options available through the TSP. Based on the above, what would be the best place to put his guard money. I imagine he will just contribute the full amount as he will still have plenty left over to save for a home.  He's planning on renting for 3 to 5 years.
As DavisGang90 and others have said, your son should maximize his contributions to the TSP.  He probably wants to reduce his taxable income a little (since he seems to have hit it with a high-paying civilian job plus his Guard pay) so I'd recommend the conventional TSP.  No need to use the Roth TSP now.

The TSP has expense ratios of about 0.025%.  I don't know anything about his 401(k) but I'm pretty sure that it has (much) higher expense ratios.  Because of this, I'd try to put as much of his Guard pay as possible into the TSP.  If he can't reach the $17,500 limit on his Guard contributions to the TSP then he should make up the rest via 401(k) contributions.  And as I tell my daughter just about monthly, if he wants to retire in his 40s then he should try to save at least 40% of his income.  That means after maxing his TSP/401(k) and his IRA then he should put even more money in his taxable investment accounts.

The Defense Finance & Accounting Service myPay site will let your son designate up to 92% of his Guard pay to the TSP.  (The other 8% is reserved for the 7.45% FICA deduction.)  He should do that right now (so that it's in place before his next drill weekend) and then do the math on whether he'll make $17,500 in Guard contributions during 2014.  If not then he should adjust his 401(k) deductions to make up the difference. 

During my spouse's Reserve years, she did the 92% deduction from her drill pay straight into the TSP.  She ended up getting Reserve paychecks like "$1.78".  Our daughter commissioned last month and has an ensign school where she's not spending much money, so she's doing the same thing with her active-duty pay-- $2500/month into the TSP.  She expects to max out her TSP and Roth IRA this year while drawing down some of her college (cash) savings.

If he is already contributing to a Roth IRA will that conflict with the RoTh TSP? Will he be limited on the maximum amount in both like with his 401(k)?
No.  They're different accounts, but they have similar names.

IRAs come in two versions:
Conventional IRA:  contributions are made from any source of earned income, and may not be deductible if income is above a certain limit.  Non-deductible contributions can always be made to a conventional IRA. 
Roth IRA:  contributions are made from any source of earned income, but are limited when income is above a certain limit.  If a high salary keeps someone from contributing to a Roth IRA then they can contribute to a conventional IRA.
In general, the total (combined) contribution limit between conventional & Roth IRAs is $5500.

The TSP comes in two versions: 
Conventional TSP:  contributions are made by payroll deduction before taxes.
Roth TSP:  contributions are made by payroll deduction after taxes.
There are similar distinctions between traditional 401(k)s and Roth 401(k)s.  The total (combined) contribution limit is $17,500. 

There's a different TSP contribution limit for deploying to a combat zone.  He doesn't need to know about that right now, but when his deployment is scheduled then he can research "IRS elective deferral limits" on the TSP.gov website.  Short answer:  when he's deployed to a combat zone, he can contribute up to $52K/year to the TSP.

Workinghard

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Re: TSP/Guard
« Reply #12 on: July 05, 2014, 10:49:01 AM »
Thanks, Nords. It's one thing to coach on things I'm familiar with but another when it comes to the a TSP. Plus you're better at explaining things than I am--maybe because you know what you're talking about! I passed on the information you shared. I should have highlighted the part about retiring at 40. :)

It's exciting when we see our kids making good financial choices and learning from our my mistakes.


sol

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Re: TSP/Guard
« Reply #13 on: July 05, 2014, 02:16:02 PM »
I agree with this too and they also have the roth TSP=good choice!

I generally discourage people from using the Roth TSP if they are shooting for any kind of early retirement.  The only exception being deployed military receiving combat pay.  If your pay is already tax free, like combat pay, then the Roth TSP makes it permanently tax free.

Workinghard

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Re: TSP/Guard
« Reply #14 on: July 05, 2014, 05:11:06 PM »
I agree with this too and they also have the roth TSP=good choice!

I generally discourage people from using the Roth TSP if they are shooting for any kind of early retirement.  The only exception being deployed military receiving combat pay.  If your pay is already tax free, like combat pay, then the Roth TSP makes it permanently tax free.

Thanks for your input, Sol. At 21 it's hard to say if he'll aim for early retirement but it's good to keep options open. He's already invested the last 2 years in a Roth IRA and will probably keep that going after his 401k.

sol

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Re: TSP/Guard
« Reply #15 on: July 05, 2014, 06:02:47 PM »
He's already invested the last 2 years in a Roth IRA and will probably keep that going after his 401k.

The Roth IRA is a great deal, and I think he's doing the right thing by contributing.  But the Roth IRA is a different animal than the Roth TSP, which competes with the tax-deferred space from the regular TSP, which is usually a better deal for people who will retire in the same or lower tax bracket than they are in while working. 

The Roth TSP was only recently created, specifically as an additional benefit for combat veterans.  For the rest of us, it doesn't make much sense.

For a kid starting out, I'd say max out the regular TSP (17.5k), then max out the Roth IRA (5.5k), and ignore the Roth TSP.  Unless he has tax exempt combat pay, in which case I'd max out the Roth TSP and then the Roth IRA.

edit:  Fixed types that Nords pointed out.  I should not try to be helpful while supervising toddlers.
« Last Edit: July 05, 2014, 07:53:50 PM by sol »

Nords

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Re: TSP/Guard
« Reply #16 on: July 05, 2014, 07:43:50 PM »
I generally discourage people from using the Roth TSP if they are shooting for any kind of early retirement.  The only exception being deployed military receiving combat pay.  If your pay is already tax free, like combat pay, then the Roth TSP makes it permanently tax free.
He's already invested the last 2 years in a Roth IRA and will probably keep that going after his 401k.
For a kid starting out, I'd say max out the regular TSP (17.5k), then max out the Roth IRA (5.5k), and ignore the Roth TSP.  Unless he has tax exempt combat pay, in which case I'd max out the Roth TSP and then the Roth IRA.
I have a different opinion based on the military's lower tax brackets and the prospect of retirement.

Junior enlisted (and junior officers in the first two ranks) are in very low tax brackets for the first 3-4 years of their careers.  It might make sense to pay the taxes now (if they're taxed at all) and enjoy the benefits of the Roth TSP.  Of course tax-free pay in a combat zone can go into a Roth TSP, but "only" the first $17,500 of the IRS elective deferral limit of $52K.  Maybe that limit will change someday.

Nobody joins the military with their eye on retiring from the military, but an active-duty military pension is a boost into the 15% tax bracket once the additional income (bridge career, rental property, investment income) is added in.  Even if the military retiree is an early retiree, they won't have as much room as they expected to convert a TSP to a Roth IRA.  It can be done but it might take a decade to stay within the 15% income tax bracket (let alone get below it).

I'd encourage anyone on their first enlistment (or first obligation) to pay the taxes up front and put all they can into the Roth TSP and their Roth IRA.  Once they're at the E-5/6 rank (depending on special pays) and O-3, maybe it's better to put their money into the conventional TSP.

Submarine officers on a nuclear bonus (after the fifth year of commissioned service)-- conventional TSP all the way.  These days the same may be true for some Navy aviators and surface warfare officers.

The Roth IRA is a great deal, and I think he's doing the right thing by contributing.  But the Roth TSP is a different animal than the Roth TSP, which competes with the tax-deferred space from the regular TSP, which is usually a better deal for people who will retire in the same or lower tax bracket than they are in while working. 

The Roth IRA was only recently created, specifically as an additional benefit for combat veterans.  For the rest of us, it doesn't make much sense.
Can you take another look at the second and third sentences of this quote from your post? 

In the second sentence you use the term "Roth TSP" twice in a row while calling one of them a different animal.  Maybe you meant to say "The Roth IRA is a different animal than the Roth TSP", but I can't tell which term should go where.

In the third sentence you say that "the Roth IRA was only recently created" as a benefit for combat veterans.  You might mean to use the term "Roth TSP". 

No wonder people are confused about the differences among various accounts with the word "Roth" in their titles.