Author Topic: Roth TSP v. Roth IRA  (Read 23640 times)

Emerald

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Roth TSP v. Roth IRA
« on: May 31, 2013, 12:06:15 PM »
Are there any advantages/disadvantages to putting money in a Roth IRA outside of TSP?  I can max out TSP contributions, or I can max out a ROTH IRA, but I can't do both (yet). 

Johnny Aloha

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Re: Roth TSP v. Roth IRA
« Reply #1 on: May 31, 2013, 12:30:17 PM »
The fund options within TSP have significantly lower expense ratios (even compared to Vanguard Admiral shares), which is a big benefit.  But with a Roth IRA, you can reclaim your contribution without penalty if you ever need to access the money ... not sure if you can with the TSP.

Emerald

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Re: Roth TSP v. Roth IRA
« Reply #2 on: May 31, 2013, 12:58:33 PM »
But with a Roth IRA, you can reclaim your contribution without penalty if you ever need to access the money ... not sure if you can with the TSP.

I think this is correct, but I'll double check. 

irastache

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Re: Roth TSP v. Roth IRA
« Reply #3 on: May 31, 2013, 05:12:29 PM »
Let's leave out the TSP because the question is more general:

Should someone contribute to a Traditional style account (taxes are deferred until retirement) or Roth style (pay taxes on deposits, no taxes later)?

The short answer is to consider your tax bracket now and compare against your retirement plan.
Do you plan on a frugal early retirement? It is likely you will be in a 10% or 15% marginal rate in retirement.
Do you plan to work to 65, save a lot of money, and spend a lot in retirement? You may be in the 25% or even 33% bracket.

Compare your plan to your current marginal rate. For people reading this, more often you will want to max out your TSP (Traditional style IRA) first.

I also look at it this way: the future is uncertain. Tax rates may change. The US could move to a national sales tax. Who knows. These things might devalue a Roth because your money would be taxed again. Take the certain thing today -- tax deduction for your current contribution.

huadpe

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Re: Roth TSP v. Roth IRA
« Reply #4 on: May 31, 2013, 09:40:22 PM »
irastache,

The question is Roth vs. Roth.  I think it basically boils down to which has better funds, and TSP is basically unbeatable.  Since they're the government, they can use the penalties people pay when they do taxable stupid stuff as offsets against the cost of operating the funds, so they have lower costs than any private fund could possibly have.  Also, if you want, you can roll the Roth TSP to a Roth IRA, so it's not like you're stuck there.  I'd go TSP.

militaryincome

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Re: Roth TSP v. Roth IRA
« Reply #5 on: June 02, 2013, 07:17:14 AM »
Are there any advantages/disadvantages to putting money in a Roth IRA outside of TSP?   

Here is a thread that might be helpful.

A lot of people recommend contributing in this order:
 
1. 401k/403b/etc to employer match
2. Roth IRA if available to max
3. 401k/403b/etc to max
4. Taxable/Other

The Roth IRA offers a lot more flexibility than the TSP/401k. If you are sure you won't need any of this money before you turn 60, the TSP is fine. However, if you think you may need to access your capital before then, the Roth IRA may be better. This is because you can access your contributions at any time.

I am hoping to be able to max out my Roth TSP, my Roth IRA, and my wife's Roth IRA this year. Even if I can't fill all 3, I'll be sure to fill the Roth IRAs first. My reasoning behind this is: If I am able to make the military a career, I will be eligible for retirement in 15 years. If we max out our Roth IRAs up until retirement, we will have $165,000 worth of contributions available. This will give me a lot more flexibility since I don't anticipate being able to save a whole lot out side of tax advantaged accounts.
 
As irastache said, you may want to consider if 100% Roth is best for you. What tax bracket are you in? What age do you plan to retire? These questions will affect what is best for you. Maybe is is a combination of regular and Roth TSP.

I personally go 100% Roth, but I paid $23 in federal income tax for 2012, and $0 for state income tax.

Emerald

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Re: Roth TSP v. Roth IRA
« Reply #6 on: June 02, 2013, 08:09:52 AM »
Are there any advantages/disadvantages to putting money in a Roth IRA outside of TSP?   

Here is a thread that might be helpful.

A lot of people recommend contributing in this order:
 
1. 401k/403b/etc to employer match
2. Roth IRA if available to max
3. 401k/403b/etc to max
4. Taxable/Other

The Roth IRA offers a lot more flexibility than the TSP/401k. If you are sure you won't need any of this money before you turn 60, the TSP is fine. However, if you think you may need to access your capital before then, the Roth IRA may be better. This is because you can access your contributions at any time.

I am hoping to be able to max out my Roth TSP, my Roth IRA, and my wife's Roth IRA this year. Even if I can't fill all 3, I'll be sure to fill the Roth IRAs first. My reasoning behind this is: If I am able to make the military a career, I will be eligible for retirement in 15 years. If we max out our Roth IRAs up until retirement, we will have $165,000 worth of contributions available. This will give me a lot more flexibility since I don't anticipate being able to save a whole lot out side of tax advantaged accounts.
 
As irastache said, you may want to consider if 100% Roth is best for you. What tax bracket are you in? What age do you plan to retire? These questions will affect what is best for you. Maybe is is a combination of regular and Roth TSP.

I personally go 100% Roth, but I paid $23 in federal income tax for 2012, and $0 for state income tax.

Right now I'm on steps 1 and 2. 

I'm eligible to retire at 57, so I may need the money before 60.  It would be nice to have it available, just in case. 

I'm in the 25% tax bracket.

Zaga

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Re: Roth TSP v. Roth IRA
« Reply #7 on: June 02, 2013, 08:31:06 AM »
I'm in the 25% tax bracket.
We are also in the 25% bracket, and therefore contribute as much to traditional 401-K (in your case it would be TSP) as we can.  Saving 25% on taxes right now on that money is hard to beat.  If we were close to the border of the 15% bracket, we'd contribute to the traditional down to that level, then to Roth beyond that.

Hopefully at some point we'll be able to max out both, but we're just not there yet.

Villanelle

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Re: Roth TSP v. Roth IRA
« Reply #8 on: June 02, 2013, 02:30:34 PM »
Some of the posts here are missing the fact that these are both ROTH options, and that this is not a regular, taxable TSP account  The Roth TSP, like a Roth IRA, is tax-free growth. This is not comparable to a 401k, it is comparable to a Roth IRA.  (Regular TSP=401k with no match for military; ROTH TSP=Roth IRA). 

I am still torn on this issue, and haven't come to a definite decision.  I like that I have so many more fund options in my Roth IRA than I do Roth TSP, but the TSP does have insanely low expense ratios.  Right now, it is mostly inertia that is keeping our money going into our Roth IRAs.

On a related note, I have been told time and time again that you can contribute to both, and that the combined total doesn't count agains the limits.  IOW, you can put the annual max in a Roth IRA, and then put additional money in the Roth TSP. 

Zaga

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Re: Roth TSP v. Roth IRA
« Reply #9 on: June 02, 2013, 03:12:14 PM »
I wasn't missing that, it's just that if they have the Roth TSP option, they most likely also have the traditional TSP option.  I was going on that assumption because the people I know who have access to the TSP can contribute either way they like.

If I'm wrong however, then the TSP expense ratios are indeed impossible to beat.

militaryincome

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Re: Roth TSP v. Roth IRA
« Reply #10 on: June 02, 2013, 10:54:50 PM »
Some of the posts here are missing the fact that these are both ROTH options, and that this is not a regular, taxable TSP account  The Roth TSP, like a Roth IRA, is tax-free growth. This is not comparable to a 401k, it is comparable to a Roth IRA.  (Regular TSP=401k with no match for military; ROTH TSP=Roth IRA). 

On a related note, I have been told time and time again that you can contribute to both, and that the combined total doesn't count agains the limits.  IOW, you can put the annual max in a Roth IRA, and then put additional money in the Roth TSP.

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. You can do this with a Roth IRA. That is the main difference in my opinion.
The Roth TSP is also subject to required minimum distributions (RMD) just like a 401k, however you can just convert it to a Roth IRA if RMDs become an issue when you turn 70.

Yes, you can contribute up to $17,500 ($23,000 if over 50) to your TSP, all Roth, or all traditional, or any combination of the two. You can still contribute $5,500 ($6,500 if over 50) to an IRA in addition to your TSP.


Right now I'm on steps 1 and 2. 

I'm eligible to retire at 57, so I may need the money before 60.  It would be nice to have it available, just in case. 

I'm in the 25% tax bracket.

I'm assuming your pension will start as soon as you retire. If you are planning to work until 57, you probalby wouldn't need a whole lot of money to tie you over until you are 59 1/2, but I'm sure you will want some. If you can't max out your TSP and IRA, I think putting money in a Roth IRA is preferrable to a taxable account, even if you are fairly certain you will need to use the money before you turn 59 1/2.

If you think you will be in a lower tax bracket when you retire, you may want to consider the tradional TSP. Possibly max out your Roth IRA, then put as much as you can into the traditional TSP?

Oops. I just fout this article:
You can withdraw from your 401k if you retire after age 55.

This kind of contradicts what I said above. I'm not sure it applies to the TSP, but I think to would.
you might be fine going 100% TSP afterall.

CorpRaider

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Re: Roth TSP v. Roth IRA
« Reply #11 on: June 03, 2013, 12:54:19 PM »
The Roth TSP (and/or IRA) is a great option for the military people when getting tax free income or the young officers who plan to retire and go make bank for defense contractors. 

huadpe

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Re: Roth TSP v. Roth IRA
« Reply #12 on: June 03, 2013, 07:58:10 PM »
Some of the posts here are missing the fact that these are both ROTH options, and that this is not a regular, taxable TSP account  The Roth TSP, like a Roth IRA, is tax-free growth. This is not comparable to a 401k, it is comparable to a Roth IRA.  (Regular TSP=401k with no match for military; ROTH TSP=Roth IRA). 

I am still torn on this issue, and haven't come to a definite decision.  I like that I have so many more fund options in my Roth IRA than I do Roth TSP, but the TSP does have insanely low expense ratios.  Right now, it is mostly inertia that is keeping our money going into our Roth IRAs.

On a related note, I have been told time and time again that you can contribute to both, and that the combined total doesn't count agains the limits.  IOW, you can put the annual max in a Roth IRA, and then put additional money in the Roth TSP.

We're talking funds here.  It's not about having a million options, it's about finding the right few options.  And the TSP has excellent options where it's hard  to go wrong.  Something like 20% of each of C, S, G, F, and I is actually a really nicely balanced 60/40 portfolio with a good mix of domestic stocks, international stocks, and a decent selection of bonds.

irastache

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Re: Roth TSP v. Roth IRA
« Reply #13 on: June 10, 2013, 07:27:07 AM »
Sorry -- my earlier reply missed the fact that we are comparing roth vs roth.

I'll go with everyone and note that TSP fees are very low and very hard to beat. The addition of the new funds make the choices in the TSP about as good as you would like.

The only negative, and this is not a reason not to use TSP, is the government paperwork. But if you have  a TSP you are used to this anyway. (I can tell you stories about my TSP and getting forms rejected for very  small mistakes and having to start all over again.)

simonsez

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Re: Roth TSP v. Roth IRA
« Reply #14 on: June 10, 2013, 08:49:20 AM »
The only negative, and this is not a reason not to use TSP, is the government paperwork. But if you have  a TSP you are used to this anyway. (I can tell you stories about my TSP and getting forms rejected for very  small mistakes and having to start all over again.)

Are you talking about distributions or something NOT related to changing the allocation or amounts you contribute? 

I do self-service through the EPP on the USDA site (maybe not all feds use this, I'm not sure) and to make changes (not anything related to distributions) to my TSP/Roth TSP it takes mere minutes and the changes are processed for that pay period with an automatic email generated directly after.  I've found it to be very easy but we could be talking about different tasks I suppose.
https://www.nfc.usda.gov/epps/

irastache

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Re: Roth TSP v. Roth IRA
« Reply #15 on: June 10, 2013, 11:30:32 AM »
Submitting separation forms (say the tsp-70) has been a nightmare. That is all. Not a reason not to use the tsp.

Riceman

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Re: Roth TSP v. Roth IRA
« Reply #16 on: June 13, 2013, 06:50:42 PM »
I have not made a withdrawal myself, but from reading about it, I recommend Roth IRA above ROTH TSP.

One problem with the TSP is that you cannot specify that you will only withdraw Roth TSP funds, or only traditional TSP funds.  If you specify a certain amount to withdraw, say 1000 dollars, you will receive an amount from each proportional to your total amount in each  fund.  Thus if you have 40k in the traditional TSP and 60k in the roth, you would receive 400 traditional dollars and 600 roth dollars as your withdrawal.  This makes any kind of tax planning more difficult and confusing.  And I know for a fact that you have money in both accounts, as matching funds can only go into the traditional TSP, and the ROTH TSP itself is only a year old. 

I am putting as much into roth TSP as I can after matching my Roth IRA and my wife's Roth IRA, but those have clear priority for me.  When I switch to an HDHP HSA, I will prioritize that above the roth TSP as well.
« Last Edit: June 13, 2013, 06:53:10 PM by Riceman »

simonsez

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Re: Roth TSP v. Roth IRA
« Reply #17 on: June 17, 2013, 09:09:17 AM »
I have not made a withdrawal myself, but from reading about it, I recommend Roth IRA above ROTH TSP.

One problem with the TSP is that you cannot specify that you will only withdraw Roth TSP funds, or only traditional TSP funds.  If you specify a certain amount to withdraw, say 1000 dollars, you will receive an amount from each proportional to your total amount in each  fund.  Thus if you have 40k in the traditional TSP and 60k in the roth, you would receive 400 traditional dollars and 600 roth dollars as your withdrawal.  This makes any kind of tax planning more difficult and confusing.  And I know for a fact that you have money in both accounts, as matching funds can only go into the traditional TSP, and the ROTH TSP itself is only a year old. 

I am putting as much into roth TSP as I can after matching my Roth IRA and my wife's Roth IRA, but those have clear priority for me.  When I switch to an HDHP HSA, I will prioritize that above the roth TSP as well.

It wasn't mentioned in this thread explicitly but I've always assumed that talking about Roth TSP means that at retirement you transfer all Roth TSP funds into a Roth IRA, preferably one that has been seasoned already.  Why?  Due to the very issue you bring up of the lack of specificity in withdrawals.  This brings back other issues in dealing with non-TSP investment options for those monies but it is an issue I'd be willing to deal with (and perhaps somewhat mitigated if the transition is from TSP investment options to similar index funds with Vanguard, plus I'd still have my regular TSP) so I could have full control of my retirement account withdrawals.

SunTzuWarmaster

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Re: Roth TSP v. Roth IRA
« Reply #18 on: October 22, 2014, 02:09:52 PM »
Sorry to perform thread-necromancy, but this is one of the most helpful articles on the web for a weird edge case of retirement (non-combat civil service early retirement tax&income optimization), and I actually dredged out the honest-to-God answer.

I found the following article EXTREMELY helpful:
http://www.fedsmith.com/2012/10/08/accessing-your-tsp-account-after-retirement/

In short, the answer (unless you are receiving tax-free pay for some reasons) is that you should be putting the money in the standard TSP, taking advantage of the tax savings now, paying less tax later (lower bracket personally or higher rates federally), and taking Substantially Equal Periodic Payments (SEPP) roughly equal to 2-3% of TSP principle.  This is done according to complicated tax rules under IRS 72t.  A calculator is available here (http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx).

In short, you can retire early while using your tax-deferred TSP investments, withdrawn tax-free in retirement, without having to go through the 5-year (ROTH TSP)->(ROTH IRA)->(ROTH IRA SEPP) conversion process.

simonsez

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Re: Roth TSP v. Roth IRA
« Reply #19 on: October 23, 2014, 07:48:03 AM »
Sorry to perform thread-necromancy, but this is one of the most helpful articles on the web for a weird edge case of retirement (non-combat civil service early retirement tax&income optimization), and I actually dredged out the honest-to-God answer.

I found the following article EXTREMELY helpful:
http://www.fedsmith.com/2012/10/08/accessing-your-tsp-account-after-retirement/

In short, the answer (unless you are receiving tax-free pay for some reasons) is that you should be putting the money in the standard TSP, taking advantage of the tax savings now, paying less tax later (lower bracket personally or higher rates federally), and taking Substantially Equal Periodic Payments (SEPP) roughly equal to 2-3% of TSP principle.  This is done according to complicated tax rules under IRS 72t.  A calculator is available here (http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx).

In short, you can retire early while using your tax-deferred TSP investments, withdrawn tax-free in retirement, without having to go through the 5-year (ROTH TSP)->(ROTH IRA)->(ROTH IRA SEPP) conversion process.

The fedsmith article does contain good information but it doesn't address the utility of tax hedging via the Roth TSP option at all.  Ceteris paribus, the traditional TSP may very well be optimal for many from a tax point of view in 2014 but quite often the ceteris is not paribus.  Who knows what will be optimal in 2020, 2030 or whichever point in the future if when rules and rates change.

Thanks for the article, I didn't know you could only make 1 partial withdrawal.  Good to know for any that will have a mix of traditional and Roth TSP funds and will want to be able to control the proportions somewhat by moving one to an external intsrument.

DoubleDown

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Re: Roth TSP v. Roth IRA
« Reply #20 on: October 23, 2014, 09:42:47 AM »
Yeah, 72t withdrawals by themselves may not be enough to support ER. Even with a sizable TSP balance, 2-3% annually wouldn't cut it to cover my living expenses, and it definitely won't if you're very young (the amount you can withdraw through 72t goes down with lower ages). Even if you had a giant amount like $1 Million in TSP, if you're limited to 2% annual withdrawals, you'll only get $20k/year. That's not going to cut it for a most folks, especially with children + college + travel + etc. With a $500k TSP balance, you get $10-15k/year.

Since Roth IRA contributions can be withdrawn tax-free at any time, it may make the most sense to utilize those (and other taxable investments) until you're able to withdraw from TSP without any restrictions (generally age 59.5).