Author Topic: Decision point for traditional vs Roth TSP  (Read 2366 times)

Travis

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Decision point for traditional vs Roth TSP
« on: November 05, 2014, 07:21:15 AM »
I max out my TSP every year and being deployed this year I was able to contribute a lot more than the normal limit.  I maxed out the $17.5k in traditional TSP and put several thousand more into a ROTH TSP for the first time.  I go back home in January and my contributions will go back down to the normal limit.  My question is whether I should stay with traditional contributions or swing over to using the Roth option from now on.  I max out mine and my wife's ROTH IRAs, my TSP, and also contribute to a taxable investment account.  My taxable income is around $85k, but for this year I'll have almost no taxable income due to the deployment.  Are there any guidelines for whether or not to go with a particular TSP type?

Gone Fishing

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Re: Decision point for traditional vs Roth TSP
« Reply #1 on: November 05, 2014, 08:01:13 AM »
I'm not up on all the rules for TSP but here is my general rule of thumb for taxes IF you are planning for ER:

If you are going to have to pay taxes on it, put it in a traditional (tax deferred) vehicle as your effective tax rate when you ER will almost certainly be lower than your current marginal rate.

If you have tax free income now, put it in a ROTH, as there is no point deferring non-existant taxes now so that you can pay taxes later. 


frugalecon

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Re: Decision point for traditional vs Roth TSP
« Reply #2 on: November 05, 2014, 08:16:15 AM »
I am facing this same issue, since I turn 50 next year and can make catchup contributions. I am considering putting the extra $6k in the Roth TSP. We are income-limited out of  Roth IRAs, and doing the backdoor route would involve having to pay taxes on legacy traditional IRAs. I basically want to diversify my tax exposure and reduce the RMDs that I will have to take. If you want to see some academic research on the subject, there is an accessible paper by Kotlikpff, Marx, and Rapson called "To Roth or Not? That is the Question." They go through some different scenarios. But it really does depend on what you think about your future tax exposure. In my case, I am most worried about the RMD issue.

VirginiaBob

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Re: Decision point for traditional vs Roth TSP
« Reply #3 on: November 05, 2014, 08:22:31 AM »
I was thinking about this same scenario and the answer is that it depends.  Are you expecting a lot of pension income/SS income during retirement and do you have a lot of exemptions/deductions now that you won't have during retirement?  If so, you may be better with the Roth TSP.  For example, right now, due to all the deductions and exemptions, my actual federal tax rate is about 2% ($2,000 on $100,000 of income).  So although I have a higher income now, my taxes are very low.   When I'm retired, my kids will be out of the house  (hopefully), and I won't have any mortgage interest.  So I may have a lower income (say $50K), but my taxes might be $10%.  In this case, the Roth would be better now.

Travis

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Re: Decision point for traditional vs Roth TSP
« Reply #4 on: November 05, 2014, 09:01:59 AM »
I was thinking about this same scenario and the answer is that it depends.  Are you expecting a lot of pension income/SS income during retirement and do you have a lot of exemptions/deductions now that you won't have during retirement?  If so, you may be better with the Roth TSP.  For example, right now, due to all the deductions and exemptions, my actual federal tax rate is about 2% ($2,000 on $100,000 of income).  So although I have a higher income now, my taxes are very low.   When I'm retired, my kids will be out of the house  (hopefully), and I won't have any mortgage interest.  So I may have a lower income (say $50K), but my taxes might be $10%.  In this case, the Roth would be better now.

I'm career Army and when I hit 20 (age 43) I'll retire with a pension worth about $50k in today's dollars.  Depending on my retirement location I should be able to FIRE at that point. I'm married with one child, no mortgage, no debt, but when we settle down I'll be looking for a 15 year mortgage.  My wife and I have been students for the last couple years so between tuition and the child credit my tax rate was roughly equal to yours.  Only one month of CY14 is taxable for me this year, but next year will be a normal year with my child being the only deduction.