I was wondering about Guitarist's comment "do not like how the Roth option is set up for the TSP". Guitarist gives the impression (possibly my mistake) that there's something about the process that makes the Roth TSP too painful.
It is a little complicated. The agency matching funds will continue to go to your traditional TSP, even if you opt for 100% Roth TSP. Then they basically maintain a funds ratio between the two as your balances grow. The expenses are the same, and withdrawals have to come from each one proportionally so you can't just withdraw from one or the other when the time comes.
I think the Roth TSP is a good benefit for everyone in the military, tax-exempt pay or not. There's a school of thought that junior military servicemembers don't benefit from the TSP because they're already in such a low tax bracket.
Unless they are already in the 100% tax free bracket, they're still better off in the traditional TSP if they are living on less than they earn if they intend to have the same income in retirement, though the benefits are certainly reduced for lower incomes.
I can see an argument for junior members expecting future raises that exceed inflation or the COLA and thus anticipating retiring into a higher tax bracket. Though I have a hard time defending giving military personnel (or any sector of the labor force, really) raises that are much higher than average when the economy is in the shitter and everyone else is suffering. It is not lost on me that the federal government pays an officer with less education and experience than me more money than they pay me as a civilian, for very similar work.
As a servicemember gets more senior and expects to retire to a military pension, it'd also make more sense to max out the Roth TSP because their pension will give them a big boost toward a higher tax bracket.
The trade off here is that while their income grows and they can afford to max their TSP, their marginal rate also climbs thus making the traditional TSP a better deal. In this balancing act, I think the key factor is your expected income in retirement relative to your income while working, regardless of absolute dollar amounts. And anyone who is still saving money while working, and thus has lower expenses than their earnings, can afford to live off of a lower income than they are making on the day they retire.
Just to complicate the issue a bit, I can envision a situation where a person is financially independent long before the military lets them retire. If they are compelled to continue working beyond the point where they need the money, then I can see the benefit of the Roth TSP.
It's somewhat of a personal question in our family, because when our daughter's commissioned in 2014 she'll be able to start contributing to the TSP or the Roth TSP.
It's personal for all of us who are currently contributing to our TSP accounts and faced with this decision, trust me.
I'm sure you're familiar with the standard advice; TSP up to the agency match, then Roth IRA because the principal can double as an emergency fund, then back to the TSP for the tax deduction up front.
Contributions to the Roth TSP are always taxed at your marginal rate while withdrawals from the traditional TSP are taxed at your effective rate. Your point about the pension eventually making up the difference is noted, but I think this is less of an issue for an ERE type who intends to retire long before being eligible for a pension, and is thus likely to spend down that TSP before then. Note that my plan is to consume most of my TSP before our pensions kick in, at which point they will cover all of our expenses.
In broad outline, the plan is to withdraw from the TSP an amount equal to the lowest tax bracket (in 2012 dollars, $36,201 per year to stay in the 10% bracket after the $11,900 exemption for married filing jointly and two personal exemptions for $3800 each). That works out to an effective rate of 4.6% on that $36, 201. I'll take that rate any day of the week.
With that number in mind, the Roth TSP is only the better option if your current
marginal rate is lower than 4.6%, which means she would have to earn less than the standard deduction of $11,900/year. Even if you figure it based on her effective rate instead of her marginal rate, 4.6% works out to about $16k/year for a married couple with no children. So a married childless couple is better off in the Roth TSP only if they collectively earn less than $16k/year. I'm sure you can do the math on her particular situation as well as I can, and I only include these numbers here to illustrate that for most people, the Roth TSP isn't such a great deal.
I'm a big fan of actually doing the math when these kinds of questions come up. I figure that any income above $36,201 can come from my Roth IRA principal (tax free, considering my costs are already sunk) or my taxable investments which are primarily taxed (for now) at the 15% long term capital gains rate. Owning rental property or having dependents obviously complicated this process, but not in a way that can't be accounted for with a little more bookkeeping. In the majority of cases, the Roth TSP seems inferior to the traditional TSP.
Unless you're earning tax free income like from a combat zone. In that case, go hog wild.
But I'm not sure if she can write a check to the Roth TSP or if she has to wait for DFAS to deduct it out of her (after-tax) pay. In the former case she could hypothetically max out the Roth TSP in January, in the latter she'd have to spread it out over 12 months.
It comes out of her paycheck each pay period, and her contributions are capped at her paycheck amount. So she can still max it out early in the year as long as she makes more than $17k early in the year while living off of other savings, then stop contributions once she hits her limit. But she'll lose any agency matching funds for any pay periods she doesn't contribute the minimum matching amount. Again, she'll have to do the math: (agency match) * (biweekly check) / 26 pay periods = minimum amount she needs to chip in every pay period. Subtract that amount from $17k to find out how much more she can contribute through frontloading. Then she could devote 100% of every paycheck up to near that amount, then a partial paycheck to hit that amount, then cut to the matching minimum amount for the remainder of the year.
Me, I just contribute my $654 every two weeks on the theory that DCA absolves me of having to think too hard.