Author Topic: My portfolio, TSP, taxes, and various other inquires from a noob  (Read 7768 times)

moo

  • 5 O'Clock Shadow
  • *
  • Posts: 4
I found this community a few days ago and I've been reading through a lot of threads here since.  I'm very impressed, seems like an extremely knowledgeable crowd here. 
Anyway, here's my story:

I'm 22 and a member of the US Air force.  I procrastinated investing for about a year, but finally threw the 15k I had saved into VSMAX (Vanguard Small-Cap Index Fund).  That was about 4 months ago, every month since I've added another 1k to it.  I know 100% stocks is frowned upon, but I have no wife, no kids, and very few bills (car insurance, internet, phone).  For the moment, I live in the barracks rent-free and am paid >$350 a month for food.  The market could plummet worse than '08 and I would not pull or even flinch. 

One thing that I have started thinking more about is international diversification.  I'd like to put some of my money into an international fund, but the ones I've looked at generally under-perform and usually have higher expense ratios (especially considering I wouldn't have enough for admiral shares).  I'm thinking about putting 3k into VGTSX (Vanguard Total International Stock Index Fund Investor Shares) but I'm not sure it's necessary, as the long-term success of the US economy is not something I am very doubtful of.  Is it generally the consensus here that exposure to international markets are an important part of any portfolio?

Another thing I am starting to think more about is the potential benefits of having some of these tax-advantaged, tax-deferred, etc. accounts.  In the Air Force they push the Thrift Savings Plan pretty hard, especially on young guys.  I thought that TSP was simply locking down the investment in exchange for some tax benefits, but after seeing threads like
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=165976&newpost=2496577
I'm beginning to wonder if I'm wasting an opportunity here.  The military doesn't do dollar-matching for retirement accounts (which is a shame-- I'd be jumping all over that), but maybe it's still worth putting money into?

I have a lot to learn about taxes.  Capital gains rate is another thing I can't quite wrap my mind around.  Being an E-3 in the military, I'm in a very low tax bracket.  Second to lowest I believe.  I've looked at some numbers for the tax rate and it says the long term rate is 0%.  Does this mean that my appreciation will be completely untaxed if I withdraw while in the same bracket?  It seems like everyone would be able to sell their stock tax-free after retiring if that were the case.  What am I missing?

Lastly, after reading about the horrors of market timing over and over again, I'm wondering if you guys advise against it for everyone or just for the average layman.  Sure, it's true that many try to time the market and fail, even a very large percentage of the "professionals".  But who is to say that one can't do lots of research on a particular business and believe with a high degree of certainty, "Yea, I think they are going to do pretty well."  Isn't this the way a legitimate way to get serious returns on investments (more than just +/- 10% on the market as a whole)?

Thanks.

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #1 on: May 21, 2015, 02:57:34 PM »
1) Depends on you - some people like having international exposure, some believe that since a large percentage of SP500 revenues are earned over seas, they don't need international company stock. Write an IPS and stick to it - the biggest struggle to investing is the psychological aspect (we'll get to that at the bottom of this reply as well) - https://www.bogleheads.org/wiki/Investment_policy_statement

2) Since you are at zero tax right now or close to it - Roth is your best ally - if you can get a Roth TSP, go for that, if not, load up $5,500 a  year on a Vanguard Roth IRA account (can be the same one each year), and then contribute whatever is left to the TSP - tax savings is still tax savings

3) Your assumption is correct - no taxes if you are in the 0-15% tax bracket, the question is, when you retire, do you think you will still be in that bracket? For a lot of people, upon retirement, they have a much larger asset base which will throw off income that knocks them above the 15% tax bracket, in which case they will be taxed on any capital gains they attempt to collect. Some people on the forums have planned their life around staying in or under the 15% income bracket so they can take advantage of the 0% capital gains benefit. Another thing to think about is that the government can always take away the 0% capital gains bracket at any time - in which case you're screwed and will have to pay taxes

4) The recommendation is for the average layman. You can definitely research companies for yourself - the problem is opportunity cost. Just because your stock pick does ABSOLUTELY well, doesn't mean that it will have done RELATIVELY well. For example, let's say the company you picked went up 20% in 2013, that's a great find! But then you look around and realize that the Vanguard total market index fund went up 35% in the same time period. A lot of people argue that it's impossible to know everything about the market and thus you should just trust that the way Vanguard allocates your money is the best way to act. Statistically they are correct - Indexing gets you results within the top quintile of funds, and the average investor - due to psychological biases (such as irrational attachment to companies they spent hours of research on, or the outsized effect that losses have emotionally versus gains of the same amount), and excessive activity (buying and selling really rack up fees, as well as short term taxes) get something like 3%-5%

If you enjoy it, I think it's a worthwhile endeavour, but just know that statistically there is a very high chance of you underperforming the market, especially if you don't have the requisite accounting literacy to read financial statements and business ownership experience to interpret business risks (for example, debt coming due in the next two years while cash flow is declining due to capital investment requirements at a steel mill, or the company that you are buying having as its main asset a production plant in tornado valley or on top of a fault line in California)
« Last Edit: May 21, 2015, 03:07:37 PM by Aphalite »

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #2 on: May 21, 2015, 05:01:22 PM »
The TSP is an insanely great 401k-equivalent. The fees are even lower than Vanguard's. You absolutely should put the full $18k into it each year if you can. They only have a few fund options, but they are really good ones. Depending on your income, either the Roth or traditional options would be good.

Mathew675

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #3 on: May 21, 2015, 07:02:59 PM »
When I got out of the Army a few years ago I left my TSP alone and let it grow. Best move I could have made. In such a low tax bracket the Roth TSP is the way to go for you I think. Good job on working on this so young, I wish I had.

wordnerd

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #4 on: May 21, 2015, 07:23:19 PM »
Definitely take advantage of your TSP. I also don't see any issue with 100% stock allocation, especially for someone so young, who presumably won't need the money immediately.

Manguy888

  • Bristles
  • ***
  • Posts: 253
  • Location: Rhode Island
    • EA Mann, Writer
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #5 on: May 22, 2015, 09:42:38 AM »
You can very easily go all stocks with international exposure by picking just 2-3 funds in your TSP. I agree with everyone else - max the TSP. The fees for all funds are around .03%, the lowest you'll find anywhere.

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #6 on: May 22, 2015, 10:01:26 AM »
40%C, 10%S, and 50%I approximates the global stock market. You're missing emerging markets, Canada, and South Korea, but I don't think that's a big deal for your purposes at this time.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3624
  • Age: 42
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #7 on: May 22, 2015, 10:21:14 AM »
I found this community a few days ago and I've been reading through a lot of threads here since.  I'm very impressed, seems like an extremely knowledgeable crowd here. 
Anyway, here's my story:
....
Welcome, Moo! First of all, congratulations on starting early and thinking about this stuff! That's great!
I was commissioned USAF in 2000 and am still mucking around in the ANG gunning for O-5. I knew about as much as you do as a 2Lt but did far less, which is why I'm still working for the government today instead of living like MMM. You're on track to do almost anything you want, if you just keep learning and applying.

As some have already noted, and even if you're in an ultra-low tax bracket, TSP is ideal for long-term gains. Your income will rise and that snowball will keep growing when you're a senior NCO (or if you punch out and make six figures as a contractor). Look forward a decade or two and the advantages become massive.

If you want to learn about taxes, let me suggest something I did as a CGO that has paid HUGE dividends: be a VITA (Volunteer Income Tax Assistance) rep for your unit. I did that in 2004, and the USAF paid me to go to school with the IRS for a full week (not sure the current program, but look into it). I kept volunteering thereafter, both on base and with a local nonprofit. Things I learned in VITA later snowballed into paid employment and helped me - among other things - manage a substantial real estate porftolio, co-found an LLC as its primary accounting/tax guy (I'm an engineer!), and generally prove myself valuable in many unexpected situations.

moo

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #8 on: May 23, 2015, 09:41:47 AM »
I'd definitely like to take advantage of that 0.03% expense ratio and tax savings but I don't like the idea of not being able to access the money until retirement.  Something could definitely come up before then.  For example, I may want to buy a house to save some money at my next duty station.  There's this "pipeline" technique for getting your out earlier but I'm a little confused by the logistics of it, and I'm not sure if relying on it is a good idea.  If I do decide to go TSP, should I just go Roth?
http://www.madfientist.com/traditional-ira-vs-roth-ira/
This page makes it sound like Traditional later converted to Roth is the best approach, paying no taxes.  But it sounds even more complicated and time-consuming.

Zephyr, how are you sir?  If you don't mind me asking, what career field are you in?  And how do you like the Guard?  I do nuclear treaty monitoring with AFTAC at Schriever; it's a fantastic job.

I appreciate all the advice from everyone.

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #9 on: May 23, 2015, 09:55:08 AM »
If you are still working for the federal government, you can take a TSP loan at any time. The terms for housing loans are generous (15 year repayment period--although I don't recommend taking that long). VA loans are pretty generous too. I know someone who got one with 0% down and 2% interest 30-year fixed.

If you want to take your money out of the TSP when you separate from federal service, you can roll it into an IRA (put the traditional into a traditional IRA, Roth into a Roth IRA). Then you can access your traditional funds through the IRA pipline. Your Roth contributions can be withdrawn once your Roth IRA is 5 years old. You don't have to wait until 59.5.

Nords

  • Magnum Stache
  • ******
  • Posts: 3271
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #10 on: May 23, 2015, 02:14:38 PM »
I found this community a few days ago and I've been reading through a lot of threads here since.  I'm very impressed, seems like an extremely knowledgeable crowd here. 
Anyway, here's my story:

I'm 22 and a member of the US Air force.  I procrastinated investing for about a year, but finally threw the 15k I had saved into VSMAX (Vanguard Small-Cap Index Fund).  That was about 4 months ago, every month since I've added another 1k to it.  I know 100% stocks is frowned upon, but I have no wife, no kids, and very few bills (car insurance, internet, phone).  For the moment, I live in the barracks rent-free and am paid >$350 a month for food.  The market could plummet worse than '08 and I would not pull or even flinch. 

One thing that I have started thinking more about is international diversification.  I'd like to put some of my money into an international fund, but the ones I've looked at generally under-perform and usually have higher expense ratios (especially considering I wouldn't have enough for admiral shares).  I'm thinking about putting 3k into VGTSX (Vanguard Total International Stock Index Fund Investor Shares) but I'm not sure it's necessary, as the long-term success of the US economy is not something I am very doubtful of.  Is it generally the consensus here that exposure to international markets are an important part of any portfolio?

Another thing I am starting to think more about is the potential benefits of having some of these tax-advantaged, tax-deferred, etc. accounts.  In the Air Force they push the Thrift Savings Plan pretty hard, especially on young guys.  I thought that TSP was simply locking down the investment in exchange for some tax benefits, but after seeing threads like
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=165976&newpost=2496577
I'm beginning to wonder if I'm wasting an opportunity here.  The military doesn't do dollar-matching for retirement accounts (which is a shame-- I'd be jumping all over that), but maybe it's still worth putting money into?

I have a lot to learn about taxes.  Capital gains rate is another thing I can't quite wrap my mind around.  Being an E-3 in the military, I'm in a very low tax bracket.  Second to lowest I believe.  I've looked at some numbers for the tax rate and it says the long term rate is 0%.  Does this mean that my appreciation will be completely untaxed if I withdraw while in the same bracket?  It seems like everyone would be able to sell their stock tax-free after retiring if that were the case.  What am I missing?

Lastly, after reading about the horrors of market timing over and over again, I'm wondering if you guys advise against it for everyone or just for the average layman.  Sure, it's true that many try to time the market and fail, even a very large percentage of the "professionals".  But who is to say that one can't do lots of research on a particular business and believe with a high degree of certainty, "Yea, I think they are going to do pretty well."  Isn't this the way a legitimate way to get serious returns on investments (more than just +/- 10% on the market as a whole)?

Thanks.

I'd definitely like to take advantage of that 0.03% expense ratio and tax savings but I don't like the idea of not being able to access the money until retirement.  Something could definitely come up before then.  For example, I may want to buy a house to save some money at my next duty station.  There's this "pipeline" technique for getting your out earlier but I'm a little confused by the logistics of it, and I'm not sure if relying on it is a good idea.  If I do decide to go TSP, should I just go Roth?
http://www.madfientist.com/traditional-ira-vs-roth-ira/
This page makes it sound like Traditional later converted to Roth is the best approach, paying no taxes.  But it sounds even more complicated and time-consuming.
Here's the simple advice:
1.  Maximize the annual contributions to your Roth TSP.  I'd recommend the "I" fund since it's a fraction of the expense ratio of other international funds.
1a.  When you're deployed to a combat zone then maximize your contributions to the Roth TSP, your traditional TSP, and your Savings Deposit Program.
2.  Maximize the annual contributions to your Roth IRA.
3.  Save even more in your taxable accounts (Vanguard index funds).
4.  Set aside 10%-15% of your net worth for your "brilliant investor" fund or for starting your side-hustle business.  Whichever you decide to do, keep track of your returns so that you can objectively assess your brilliance.  I suspect that you'll learn the same lesson that I and everyone else (except Warren Buffett) has learned:  your returns are more a function of your man-hours of research & tracking effort, and you can achieve at least 80% of that return through index funds with about 10% of the effort.

As for whether to invest internationally, the answer is "You need to develop an asset allocation plan."  My spouse and I have about 25% of our investment portfolio in international funds simply for the diversification benefits, but that's part of our asset allocation plan.  You could decide that American corporations are global enough for you to simply focus on the total U.S. stock market, or you may prefer the total market.  The Bogleheads Wiki will help you develop your own investment policy statement and your asset allocation plan, and then you just have to pick the low-expense index funds.  In general, you'll use the TSP as much as you can and then pick the rest of your funds for your asset allocation in your Roth IRA and your taxable accounts.  I suspect that your TSP will be mostly "I" and "S" funds (which are generally high expense ratios in their civilian fund equivalents) while your Roth IRA and your taxable accounts will be more total stock market.

As long as you're in the military, I don't see any reason to invest in bonds or bond funds.  When you're planning to leave the service then you may want more bonds (for diversification)-- or you may just include dividend stocks in your asset allocation plan. 

You have way more human capital in your Air Force specialty than you have time for picking and managing your individual investments.  It becomes even more difficult when you're deployed to the middle of the desert with insufficient bandwidth.  While you're in uniform, your optimum use of your time is personal development.  Stick with the index funds (max return for minimal effort) and focus your exertion on advancing and promoting-- not just in your skills and your rank, but also in a college degree and professional certifications.

You're correct that you have minimal tax advantage at your income.  You won't be paying income tax for several years at least, so contribute to the Roth versions of those accounts. 

You're wrong on "not being able to access the money until retirement".  You'll keep your money in the TSP as long as you possibly can (those low expense ratios) and if you want money for a house (or a transition) then you'll divert your savings from your taxable investment accounts to your house fund or your transition fund.  (A house is just a different part of your asset allocation plan.)  You'll also be able to withdraw your Roth IRA contributions at any time for any purpose.  In other words, you have plenty of money in your taxable accounts and your Roth IRA contributions (from your incredible human capital) to not need to touch the TSP.  And when the day comes that you do want to touch the TSP, that pipeline technique works just fine.  Relying on it is a good idea because you'll have plenty of financial flexibility in the rest of your accounts while you're setting up the pipeline and waiting the five tax years for the results.  The irony is that your human capital means you might not ever need to touch your TSP funds before retirement.  You already have plenty of financial flexibility, so don't worry about the logistical challenge of the Roth TSP conversion pipeline.

You're correct in your assessment of the capital gains of your taxable accounts.  You're not missing anything, and indeed Jeremy & Winnie of GoCurryCracker.com have not paid any taxes since their early retirement.  The federal government wants you to invest for the long term, not trade like a hypercaffeinated jackrabbit.

The "horrors of market timing" are based on years of statistical analysis of investment research.  However, once again, your returns are generally a result of the amount of time and learning that you devote to the task.  For most of us, we'd rather live our lives.  However there are individuals who are hard-wired to research a sector, identify an opportunity, and outperform the market.  Warren Buffett is one of those individuals, and Charlie Munger is another.  Their CIOs (Weschler and Combs) also had successful careers long before joining Berkshire.  It's worth noting that it took Buffett & Munger over 50 years to get to their current levels of performance, and they made plenty of mistakes along the way. 

Another investor whose methods you might want to emulate is the Dividend Growth Investor.  Read his blog and follow his criteria & analysis-- they're relatively straightforward and (unlike swing trades) you are amply compensated for the small additional risk.  It's possible that you're hard-wired like him (and Buffett and Munger) to devote the hours it takes to perfect your skills.  If you lack the time & patience to follow his methods, then stick to index funds and enjoy more work/life balance. 
« Last Edit: May 23, 2015, 02:20:00 PM by Nords »

TomTX

  • Magnum Stache
  • ******
  • Posts: 4091
  • Location: Texas
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #11 on: May 25, 2015, 08:52:31 AM »
At your tax rate: Roth everything,  including what you already have in taxable. Will take some time.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3624
  • Age: 42
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #12 on: May 28, 2015, 10:32:58 AM »
Zephyr, how are you sir?  If you don't mind me asking, what career field are you in?  And how do you like the Guard?  I do nuclear treaty monitoring with AFTAC at Schriever; it's a fantastic job.
I'm a 17D in a combat comm slot, just moved from squadron to group and am getting more into policy and logistical support vs. my previous "deploy and provide services" mode. My favorite thing about the guard is civil disaster response. Not much is more gratifying than helping my own community and state prepare for, mitigate, and recover from, its biggest challenges. Next week I'm on orders to staff my state's joint ops center for a hurricane response exercise, which I did last year and was a blast.
We also get a pretty decent flow of deployment opportunities but are almost never non-vol'd.

grettman

  • 5 O'Clock Shadow
  • *
  • Posts: 84
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #13 on: May 28, 2015, 04:14:17 PM »
...By the way, congress wants to change the fact that you don't get a match for your TSP.  The budget resolution recently passed has this requirement included..... now the appropriators need to get to work and send a bill to the president to sign that will make it into law.  Since this is one that most folks don't have a problem with, I think you have a good chance of getting your match starting in FY 17.


Nords

  • Magnum Stache
  • ******
  • Posts: 3271
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #14 on: May 28, 2015, 04:42:01 PM »
...By the way, congress wants to change the fact that you don't get a match for your TSP.  The budget resolution recently passed has this requirement included..... now the appropriators need to get to work and send a bill to the president to sign that will make it into law.  Since this is one that most folks don't have a problem with, I think you have a good chance of getting your match starting in FY 17.
The military branches have had the authority for years to match TSP contributions.  It's been viewed as a retention mechanism but apparently not a very effective one, because I've never heard of it being used.

The retirement overhaul has a number of drawbacks to go with the possibility of a TSP match.  I'm not going to predict whether it'll pass, but to date the financial analysis of the options has been less than helpful.  And like the 1986 version of REDUX, the latest retirement reform plans would seem to discourage retention.  The idea of giving servicemembers more money earlier in their careers seems to give them an additional financial motive to leave before 20.  Great for veterans, not so great for DoD.

Travis

  • Magnum Stache
  • ******
  • Posts: 3005
  • Location: South Korea
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #15 on: May 28, 2015, 05:08:57 PM »
Quote
But who is to say that one can't do lots of research on a particular business and believe with a high degree of certainty, "Yea, I think they are going to do pretty well."  Isn't this the way a legitimate way to get serious returns on investments (more than just +/- 10% on the market as a whole)?

The ones who do all of that research have devoted their lives to the subject and don't get it right nearly enough to qualify as anything approaching "certainty."  Warren Buffett (one of the biggest reputable names in investing) is in the middle of a decade-long contest with a hedge-fund manager on who can get the best returns (Buffett in a Vanguard index fund and the hedge fund team playing their own game).  The contest has been going for about five years and Buffett is way ahead. 

http://www.cnbc.com/id/101394085

http://www.bankrate.com/financing/investing/buffetts-bet-on-index-funds/

Migrator Soul

  • Stubble
  • **
  • Posts: 145
  • Age: 28
  • Location: Texas
  • The sooner you realize life is hard, the better.
    • Cerebral Combatant
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #16 on: May 28, 2015, 05:23:24 PM »
...By the way, congress wants to change the fact that you don't get a match for your TSP.  The budget resolution recently passed has this requirement included..... now the appropriators need to get to work and send a bill to the president to sign that will make it into law.  Since this is one that most folks don't have a problem with, I think you have a good chance of getting your match starting in FY 17.
The military branches have had the authority for years to match TSP contributions.  It's been viewed as a retention mechanism but apparently not a very effective one, because I've never heard of it being used.

The retirement overhaul has a number of drawbacks to go with the possibility of a TSP match.  I'm not going to predict whether it'll pass, but to date the financial analysis of the options has been less than helpful.  And like the 1986 version of REDUX, the latest retirement reform plans would seem to discourage retention.  The idea of giving servicemembers more money earlier in their careers seems to give them an additional financial motive to leave before 20.  Great for veterans, not so great for DoD.

Yeah, I looked at the proposed changes to the retirement plan myself. (23, Active Army) and I prefer the way the plan is currently, since I plan for staying 20. Good news is I believe they were planning on grandfathering those of us already in the service.

Nords

  • Magnum Stache
  • ******
  • Posts: 3271
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #17 on: May 28, 2015, 06:21:11 PM »
Good news is I believe they were planning on grandfathering those of us already in the service.
That's correct.

The legislation will give today's servicemembers a choice of either plan.  The same logic as the Career Status Bonus choice with REDUX.

moo

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #18 on: May 30, 2015, 03:44:32 AM »
The Roth TSP seems like a good move but I'm still not sure on some of the details.  For instance when it says "You pay taxes on your contributions as you make them..", does this mean all contributions are taxed separate from my income or does it mean contributions simply aren't tax-deductible?  If I put in $100, all $100 stays in the account, right?

Even if this is the case, I'm wondering how much tax-free withdrawing will really matter in my situation.  It seems like if I carefully planned it out then I could withdraw from my taxable accounts tax-free as well, unless the 0% capital gains is removed.  Either way, I can't stop thinking about the significance of the 2/3 reduction in expense ratio.

At your tax rate: Roth everything,  including what you already have in taxable.

I'm trying to decide whether Rothing everything is actually smart or not.  I suppose after 5 years that money is no more trapped than in a regular taxable account, so maybe this is my best option.

..I think you have a good chance of getting your match starting in FY 17.

A man can dream.

My favorite thing about the guard is civil disaster response. Not much is more gratifying than helping my own community and state prepare for, mitigate, and recover from, its biggest challenges. Next week I'm on orders to staff my state's joint ops center for a hurricane response exercise, which I did last year and was a blast.

Most of my family was flooded by Katrina so I can really appreciate that. 



In other news, I ran some numbers
 (mostly using http://www.firecalc.com/index.php)
and I think retiring in 10 years probably isn't possible for me.  That's annoying because if I want to stay in the air force after that it would mean another 6 years and, after 16 years of service, I may as well do the last 4 for retirement.  Retiring at 42 isn't very early.  I guess if that's the way things pan out, I'll at least be megarich with the military pension in addition to my savings.


Nords

  • Magnum Stache
  • ******
  • Posts: 3271
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #19 on: May 30, 2015, 11:36:27 AM »
The Roth TSP seems like a good move but I'm still not sure on some of the details.  For instance when it says "You pay taxes on your contributions as you make them..", does this mean all contributions are taxed separate from my income or does it mean contributions simply aren't tax-deductible?  If I put in $100, all $100 stays in the account, right?

Even if this is the case, I'm wondering how much tax-free withdrawing will really matter in my situation.  It seems like if I carefully planned it out then I could withdraw from my taxable accounts tax-free as well, unless the 0% capital gains is removed.  Either way, I can't stop thinking about the significance of the 2/3 reduction in expense ratio.
When you contribute $100 to the TSP, all $100 goes to the TSP.  (The annual expense ratio is taken out sometime during the subsequent year, but it's done by adjusting the share prices of the individual funds.  You don't see an actual deduction from your account for expenses.)  The contributions to the Roth TSP are not tax-deductible.

Contributions to the traditional TSP are deducted before DFAS calculates your taxable income, and your income tax withholding is taken from the remaining amount.  Contributions to the Roth TSP are not deductible so they're taken from your pay after DFAS calculates your taxable income, and your income tax withholding should be a little higher. 

When you're in a combat zone, all of your pay is tax-free so DFAS just doesn't include it in their calculations.  But even though the total TSP contribution limit from a combat zone is $53K, the Roth TSP still has a contribution limit of $18K.  You have to put the other $35K in the traditional TSP, where the tax-free contributions are tracked for the rest of the time that your TSP account is open.

You could carefully manage your taxable accounts to stay within the 0% capital gains limit.  The political risk is that you don't know when the laws might change.  You also don't know what your income will look like when you reach FI.  If you have a pension or significant rental income then you may blow right through the 0% cap gains bracket.

You can avoid the political risk with the TSP while enjoying the world's lowest expense ratios.  You can also incrementally convert everything to a Roth IRA during years when your taxable income is low, and after that is finished then you don't have to worry about managing anything.

In other news, I ran some numbers  (mostly using http://www.firecalc.com/index.php) and I think retiring in 10 years probably isn't possible for me.  That's annoying because if I want to stay in the air force after that it would mean another 6 years and, after 16 years of service, I may as well do the last 4 for retirement.  Retiring at 42 isn't very early.  I guess if that's the way things pan out, I'll at least be megarich with the military pension in addition to my savings.
Well, there's no sense engaging in deprivation now in pursuit of FI later.  The military has already given you plenty of deprivation experience.
http://the-military-guide.com/2010/12/22/frugal-living-is-not-deprivation/

You do the best you can while still enjoying your life.  Tracking your expenses helps you identify the wasted spending, and that alone will probably boost your savings rate over 50%.  You'll align your spending with your values, and if something has enough value for you then you'll be willing to work the extra years to pay for it.  You're the guy who gets to determine "value"-- whether that's bicycling around town or paying up to do the same errands in an Escalade-- because you're the one who's willing to pay the price for it.

Here's an alternative to your financial forecast:  take it one tour at a time and stay on active duty as long as you're having fun.  When the fun stops, consider giving it one more tour or just leave active duty then.  Take a drilling billet with the Reserves or Guard and do that as long as you're having fun.  It's a lot easier to get to 20 good years in the Reserve/Guard than it is to do 20 years of active duty.  If you're not having fun on active duty then you will definitely adversely impact your mental, physical, and emotional health.  I hear that all the time from my readers, and one of my high-school classmates just got the grim news about what the military's stress has done to his health.  100% disability ain't much help for his remaining life expectancy.

"One tour at a time" is the same advice I give my daughter.  She appreciates it a lot more now that she's on sea duty than she did when she was thinking about joining the service.

Leaving active duty before 20 means that you won't retire to an immediate COLA'd pension.  However staying in the Guard/Reserve to reach a total of 20 good years means that your COLA pension will kick in at age 60 (possibly a little earlier if you deploy to a combat zone), at the pay tables in effect when you turn age 60, and at the longevity of your rank as though you'd been on active duty the entire time until reaching age 60. 

That's such a big freakin' deal, and I didn't understand it when I first learned of it in 1993, that I'm going to say it again. When you "retire awaiting pay" from the Reserve/Guard, your longevity in your retirement rank continues to accumulate.  If you're 42 years old when you reach 20 good years, and you retire then as an E-7>20, when you're 60 years old you'll be considered to be an E-7>38.  Not only that, but instead of using the pay tables in effect in 2031 (when you reach 20 good years and retire awaiting pay) your pension will be calculated from the pay tables in effect in 2049 (when you reach age 60).

Play around with the pay tables.  You can use today's pay tables to estimate your Reserve/Guard pension by assuming that military pay will keep up with the CPI (or at least with your personal inflation rate) and using the maximum pay for your potential retirement rank.  The significance of this pension is that your savings (both tax-deferred and taxable accounts) might only have to last until you reach age 60.  If that's not enough to cover the gap, then you start a bridge career of traditional civilian employment or part-time work or entrepreneurial freelancing.

That's what my spouse did when she left active duty.  By then I already had 17+ years of my active duty and had been extended at my duty station (a training command) until retirement at 20.  When the fun stopped in her career she left active duty for the Reserves.  When I retired in 2002 my pension wasn't enough to cover all the bills, but it looked like our savings would cover the 20 years until her Reserve pension started.  (Her Plan B was getting a part-time job.)  13 years later my pension has grown by 28% from COLAs, our expenses have dropped by over 40% (mostly through mortgage refinancings and our daughter leaving the nest), and our investments have grown faster than inflation.  We retired on a three-legged stool that we won't even have to sit on.

Here's a simplified example of how you'd forecast your Reserve/Guard retirement:
http://the-military-guide.com/2010/12/15/retiring-on-multiple-streams-of-income/

Here are the gory details on the Reserve/Guard finances and the pension:
http://the-military-guide.com/2010/12/06/retiring-from-the-reserves-and-national-guard/
http://the-military-guide.com/2012/02/27/calculating-a-reserve-retirement/
They're the most popular posts on the blog... especially on Sunday evenings.
« Last Edit: May 30, 2015, 11:38:35 AM by Nords »

moo

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #20 on: June 01, 2015, 06:33:51 AM »
Thanks, I enjoy the new perspective on everything-- especially the military stuff.  I am starting to visualize where I will be down the road, something I never really bothered to do previously.

However, I do have one more concern before the hefty contributions to TSP I submitted today go into effect in two weeks.
What EXACTLY will I have to go through to get access to my Roth TSP savings if I do indeed retire earlier than my 50s?
(I feel very strongly about retiring before then, hopefully much sooner.)

Some of the things I have been reading here and there
(example:  http://forum.mrmoneymustache.com/investor-alley/roth-tsp-v-roth-ira/msg432377/#msg432377 )
are really confusing me.

Quote
The Roth TSP is essentially a Roth 401k, not a Roth IRA. Yes they are bot Roth, but you can not withdraw contributions before age 59 1/2 with the Roth TSP.

Definitely not what I was thinking.. I was under the impression I could withdraw any of the principal I wanted at any age if I just waited five years after contributing to it.


5 minutes after submitting this post I run into this:
http://forum.mrmoneymustache.com/investor-alley/non-tax-sheltered-investments-a-requirement-for-early-retirement/msg624243/#msg624243

Some clarity here would be brilliant.
« Last Edit: June 01, 2015, 06:37:54 AM by moo »

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #21 on: June 01, 2015, 08:44:02 AM »
However, I do have one more concern before the hefty contributions to TSP I submitted today go into effect in two weeks.
What EXACTLY will I have to go through to get access to my Roth TSP savings if I do indeed retire earlier than my 50s?
(I feel very strongly about retiring before then, hopefully much sooner.)

WORST case scenario you pay 10% (still lower tax than almost any bracket) to get money out, but the idea is that you transfer your Roth TSP to a Roth IRA, and after 5 years you can take out contributions (earnings you will still have to wait until 59.5, but you can contribute up to 18k a year into your TSP)

In the meantime, you'll need a 5 year pipeline of funds from a taxable account or savings, but remember that 10% isn't a death sentence, it's still better than most other tax consequences - you can pay that for the first 5 years and then access contributions tax free

Nords

  • Magnum Stache
  • ******
  • Posts: 3271
  • Age: 59
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: My portfolio, TSP, taxes, and various other inquires from a noob
« Reply #22 on: June 03, 2015, 01:10:21 PM »
Thanks, I enjoy the new perspective on everything-- especially the military stuff.  I am starting to visualize where I will be down the road, something I never really bothered to do previously.

However, I do have one more concern before the hefty contributions to TSP I submitted today go into effect in two weeks.
What EXACTLY will I have to go through to get access to my Roth TSP savings if I do indeed retire earlier than my 50s?
(I feel very strongly about retiring before then, hopefully much sooner.)

Some of the things I have been reading here and there
(example:  http://forum.mrmoneymustache.com/investor-alley/roth-tsp-v-roth-ira/msg432377/#msg432377 )
are really confusing me.

Quote
The Roth TSP is essentially a Roth 401k, not a Roth IRA. Yes they are bot Roth, but you can not withdraw contributions before age 59 1/2 with the Roth TSP.

Definitely not what I was thinking.. I was under the impression I could withdraw any of the principal I wanted at any age if I just waited five years after contributing to it.


5 minutes after submitting this post I run into this:
http://forum.mrmoneymustache.com/investor-alley/non-tax-sheltered-investments-a-requirement-for-early-retirement/msg624243/#msg624243

Some clarity here would be brilliant.
Well, I had to look up "ceteris paribus" from that first link.  In your case, all things are not equal.  You're in the world's lowest tax brackets now, and it makes more sense to pay your taxes at those lower brackets.  When you file a tax return you'll have exemptions, the standard deduction, possibly the Earned Income Tax Credit, and possibly (someday) a childcare tax credit.  In other words you'll be paying zero taxes.  You don't need to make deductible contributions to tax-deferred retirement accounts when you can pay "zero" tax now. 

But when you stop working for a paycheck, you'd like to be FI and then ER and could perhaps do Roth IRA conversions in a zero tax bracket like Jeremy & Winnie of GoCurryCracker.com.  If that's the case then you could hedge your options by putting some contributions in the Roth TSP and some contributions in the traditional TSP.  But if you're not paying taxes now then you don't "need" extra deductions.

That second quote about Roth 401(k) and withdrawing contributions is just part of the picture.  It's true that you can't withdraw Roth 401(k) contributions at any time for any reason like you can with Roth IRAs.  However you can transfer a Roth 401(k) to a Roth IRA, wait five tax years, and then withdraw the amount of the transfer whenever you want.

That third link by SaintM (who is no longer on this forum) and the correction by Frankie's Girl... it's correct for Roth IRAs and wrong for Roth TSPs.  Frankie's correction refers to just the Roth IRA, so I can see where the confusion arises.

The Roth TSP withdrawal rules are very confusing, and I certainly had trouble figuring them out the first time through.  Here's the post (with all of its subsequent corrections):
http://the-military-guide.com/2012/03/19/is-the-roth-thrift-savings-plan-right-for-you/

I would not obsess about access to tax-deferred funds after leaving the service.  If you skip out on the TSP because "you might need the money" then you'll also miss out on the low expense ratios and the opportunity to either (1) never pay taxes on withdrawals or (2) pay them at a lower rate when you're FI.

What you really want to do is forecast how much you'll need during the first five years after FI when you're no longer bringing home a paycheck or dividends or any other income. 

Briefly, when you leave the service you'll have at least three investment accounts:  a Roth TSP, a Roth IRA, and taxable investments.  For the next five years or so of ER, when you need to tap your funds then you'll chew through the taxable investments.  When that's depleted then you'll spend the contributions to the Roth IRA, which can be withdrawn at any time for any reason. 

At the start of that five years, before you touched either account, you'll transfer your Roth TSP directly to a new Roth IRA account (or an existing Roth IRA account) and then you'll let those transferred funds sit for five tax years.  At the end of that five tax years, the principal amount that you moved from the Roth TSP (but not its gains during that next five tax years) can be withdrawn from the Roth IRA with no taxes or penalties.  Michael Kitces has several references and examples in this post:
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

and I go into the excruciating details here:
http://the-military-guide.com/2014/03/20/early-withdrawals-from-your-tsp-and-ira-after-the-military/

If you stick around for an active-duty pension, or if you start a bridge career after leaving the military, then you might not ever need to touch your Roth IRA before 59.5-- let alone your Roth TSP.  You might be able to support all your living expenses off investment income, pension income, side-hustle part-time income, and the principal your taxable accounts.

In my case, after 13 years of retirement (and with five years to go until I reach age 59.5) it's become apparent to my spouse and I that we won't need our Roth IRAs or our TSP accounts.  We're converting our TSPs to Roth IRAs, but then they'll sit there until we find a reason to spend them.
« Last Edit: June 03, 2015, 01:15:02 PM by Nords »