Author Topic: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA  (Read 12679 times)

militaryincome

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Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« on: July 12, 2012, 10:06:49 AM »
I've currently got $9,300 in my regular TSP account. I believe it is 60% Small Cap and 40% International right now.
I've been diverting my retirement savings into a savings account. ($3,300)

I want to open a Roth IRA and am not exactly sure where to go.
Should I go with the TSP, or is there a better Roth IRA I should look into?
If I do open the TSP Roth IRA how should I allocate the funds?

I'm 23 years old and really not concerned with risk. I'm just looking for the best return in the long run. (Aren't we all)

Any advice or recommendations are greatly appreciated.

Guitarist

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #1 on: July 12, 2012, 11:25:16 AM »
For the record, the TSP is not an IRA, it is more like a 401k.

I opened a Roth IRA, I do not like how the Roth option is set up for the TSP so I am not messing with it.

astadt

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #2 on: July 12, 2012, 04:17:00 PM »
So the great news about the Roth TSP is that its exactly like a Roth 401k...SOOO... you will be able to contribute to both your Roth IRA and a Roth 401k up to the maxes on both.

Remember that depending on your Tax bracket, it might be a better idea to go with the regular TSP vice Roth.

I am planning on continuing my plan as normal and potentially starting to contibute to my roth TSP over the regular TSP  just because the benefits are so high with Roth.

I would really recommend you shift some money to the C fund as you current allocation currently skips a major section of the world economic allocation, the SP 500.

I personally have a 50-25-25 approach with C-S-I funds. I also shift money periodically over to the G and F to keep about a 90% - 10% asset mix (Equity to Bonds) .

Finally you can open a ROTH IRA just about anywhere as its a vehicle for investments vice an actual investment. I'd recommend looking at Vanguard, Fidelity, or TD Ameritrade as they have no fee Roth IRAs and low cost investment options. But theres tons of choices. Remember you can contribute to BOTH a Roth IRA and Roth TSP.

militaryincome

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #3 on: July 15, 2012, 10:41:53 AM »
For the record, the TSP is not an IRA, it is more like a 401k.

I opened a Roth IRA, I do not like how the Roth option is set up for the TSP so I am not messing with it.

What don't you like about the way it's set up? Is it any different than the regular TSP?

I'm pretty sure I won't be paying any income taxes this year thanks to the Credit for Qualified Retirement Savings Contributions. I'll get the full $2000 as long as I contribute $4000.

I'm definitely going to re-balance my account. I think I just chose the most volatile ones at the time.  Now I just need to find my account information. :( 

Nords

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #4 on: July 15, 2012, 03:06:50 PM »
I opened a Roth IRA, I do not like how the Roth option is set up for the TSP so I am not messing with it.
I'd like to learn more about this.  What is it that you don't like about the setup?

Have you been able to make a contribution to the Roth TSP yet?  I know DOJ and some DoD civilians have the option now, and the Marines are supposed to be getting the option this month, but I think the rest of the military has to wait until October.

James

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #5 on: July 15, 2012, 05:50:45 PM »
I want to open a Roth IRA and am not exactly sure where to go.


An easy way to open a Roth is simply opening one at Vanguard in sending a check or transferring the money.

sol

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #6 on: July 15, 2012, 07:42:33 PM »
I'd like to learn more about this.  What is it that you don't like about the setup?

I'm also a fed, and I'm also not messing with the Roth TSP.  I looked into it in some detail, and decided it's not really well suited to someone like me who intends to retire early.

The Roth TSP is basically just like a Roth 401k, meaning that contributions are taxed as regular income and are capped at 17k between the Roth TSP and traditional TSP.  Then they grow and come out tax free, assuming you leap the right hurdles.

The hitch is that an ERE-type will generally be saving substantial sums for retirement, meaning they currently live on less than they earn.  If you intend your effective income to remain the same in retirement, then your income will be lower after you are done saving and you will thus be in a lower tax bracket.  If you're in a lower bracket, the traditional TSP is a better deal.

The Roth TSP was created as a new benefit for military personnel who earn tax-exempt income.  For them, a big tax free paycheck from a combat zone can go right into the Roth TSP without paying any taxes on income, no taxes on growth, and no taxes on withdrawal; it is totally tax free money in every respect forever.

The only other group I can think of who will benefit from the Roth TSP are people who really love their jobs, work long careers while saving a little money, and then retire into a higher tax bracket.  In the federal workforce, this includes people with lifetime appointments like judges and some scientists who can do their jobs well into old age and don't have much incentive to retire.

Nords

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #7 on: July 15, 2012, 11:42:07 PM »
The only other group I can think of who will benefit from the Roth TSP are people who really love their jobs, work long careers while saving a little money, and then retire into a higher tax bracket.  In the federal workforce, this includes people with lifetime appointments like judges and some scientists who can do their jobs well into old age and don't have much incentive to retire.
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.

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.  They might as well pay taxes on the income, max out a Roth IRA, and be able to tap those contributions later on in life.  However as they become more senior, they'd be able to max out both a Roth IRA(s) and the Roth TSP.  And as you pointed out, in a combat zone they'd be able to stash up to $50K in a Roth TSP. 

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. 

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.  (She already maxes her Roth IRA.)  With the current setup it looks as though the Roth TSP is a better investment for her.  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.

I'm skeptical that the Roth TSP was created by DoD just out of the goodness of their hearts.  It has essentially zero retention value to a teenage recruit.  It's a program that mirrors the civilian Roth 401(k) program, not an original initiative.  I suspect that in 10-20 years DoD will use the Roth TSP as a mechanism to allow them to cut back on the traditional military pension, just as today's civilian employers are cutting back on defined benefits pensions.  I think anyone who's in the military now (and probably anyone who joins the military in the next decade) will still be able to count on the current military pension system.  After that, though, it's anybody's guess.
« Last Edit: July 15, 2012, 11:46:01 PM by Nords »

mike@livetheneweconomy

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #8 on: July 16, 2012, 03:53:25 PM »
I suspect that in 10-20 years DoD will use the Roth TSP as a mechanism to allow them to cut back on the traditional military pension, just as today's civilian employers are cutting back on defined benefits pensions.  I think anyone who's in the military now (and probably anyone who joins the military in the next decade) will still be able to count on the current military pension system.  After that, though, it's anybody's guess.

Bingo!  Though I'm not sure that the current pension will last even that long!

militaryincome

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #9 on: July 16, 2012, 09:52:27 PM »
Thanks for all the info!

Since I will be getting 50% back on the first $4,000 I contribute and my income after deductions wont break into the 15% bracket, I'm thinking a Roth would be the best option for now. Uncle Sam pays good money for people on the bottom to save for retirement.

It looks like the biggest cons to the Roth TSP are that you cannot withdraw contributions and obviously you are limited to their funds.

I was wondering if anyone had done a performance comparison with the TSP to Vanguard or other similar funds?

sol

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #10 on: July 16, 2012, 09:55:33 PM »
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.

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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.

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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.

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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.

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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.

sol

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #11 on: July 16, 2012, 09:59:20 PM »
I was wondering if anyone had done a performance comparison with the TSP to Vanguard or other similar funds?

Yes, this is pretty common knowledge.  You'll be happy to know that the TSP has ridiculously low expense ratios on all of it's funds, by virtue of having such large sums to work with from 2 million participants.

In addition, federal employees get access to the G fund, which offers a risk/return spread unmatched anywhere else in the broader market.  It's typically a very small part of your overall portfolio, but for that small part, it's a winner.

Nords

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #12 on: July 16, 2012, 10:32:29 PM »
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.
Thanks, I understand now.

In case you're not aware of it, the military does not get an "agency match".  (Not yet, anyway.)  So that math is simpler.  I've also seen servicemembers set their TSP contribution at 92% of their pay (leaving room for the SS/Medicare deductions) early in the year and then backing off when they reach the limit.  Of course the TSP starts returning anything over the limit if they don't adjust their contribution in time.

Thanks for all the info!
It looks like the biggest cons to the Roth TSP are that you cannot withdraw contributions and obviously you are limited to their funds.
I was wondering if anyone had done a performance comparison with the TSP to Vanguard or other similar funds?
I've never done a performance comparison, but the TSP funds are even larger than Vanguard and they have lower expense ratios.  So you'd hope that they'd outperform by a few basis points.

I've mulled over a blog post of the TSP vs other brokerages like Vanguard.  What stops me is that you can contribute more to the TSP ($17K-$50K) than a Roth IRA ($5K-$10K) and the TSP has the lower expense ratios.  So the only way for Vanguard to "win" the race would be to hold both contributions constant and compare Vanguard's best-performing funds to the TSP's worst-performing fund... in other words, an apple-orange data-mining comparison.  The reality is that (for now) it might make more sense to contribute to a Roth IRA, but when that has a few years of contributions then the TSP can quickly catch up.

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.
My usual response to these sentiments is that servicemembers earn the "extra" pay & benefits by defending your First Amendment freedom to make those comments.
« Last Edit: July 16, 2012, 10:44:12 PM by Nords »

sol

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #13 on: July 16, 2012, 11:10:02 PM »
My usual response to these sentiments is that servicemembers earn the "extra" pay & benefits by defending your First Amendment freedom to make those comments.

I know I never win any brownie points by suggesting that military personnel are anything less than anointed.  I didn't mean it as a personal attack.

The heart of my complaint isn't that military employees are overpaid, because they're clearly not, but rather that as a civilian federal employee I feel considerably underappreciated and undervalued.  It stings a little bit when Congress gives my army friends generous pay raises while I suffer under a pay freeze from the same employer.

Ultimately, this complaint has more to do with the federal pay system rewarding tenure and not job performance, as I feel that excellence in any job is actively discouraged when everyone is equally rewarded for vastly different levels of job success, than it does with any differences between military and civilian pay scales.

Perhaps I'm just not cut out for federal service.  High performers are better compensated in the private sector.

grantmeaname

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #14 on: July 17, 2012, 07:43:41 AM »
Bogleheads has a great TSP page comparing funds to their closest Vanguard equivalents and discussing the merits of the plan on the whole. It has notes about which funds are best to hold in your TSP versus your brokerage accounts (hint: it's the G fund), too. I imagine most of you have seen it already, but if not it bears a mention (and Nords, it could be a valuable fact-check for your blog post).

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Re: Thrift Savings Plan (TSP) Fund Allocation and new Roth IRA
« Reply #15 on: July 27, 2012, 09:34:30 PM »
Summarizing:
 - This is an option for people who believe that their tax rate will be LARGER in retirement
 - This option is similar to a privately managed option with less selection, but lower expenses
 - This option is nowhere near as awesome as the ROTH IRA option
 - There are not many people in this category, but generally includes (1) people who have low taxes (tax-free military pay, wife is losing large sums in a side business venture, unique qualification for some tax break) or (2) people who believe that they will have large retirement incomes (60-year federal employee, someone making a killing in a side business)

If you are in category (1), do it (after maxing your ROTH IRA).
If you are in category (2), please note that you are forecasting many years into the future, and will take a monetary penalty for being incorrect.

As an example, I have 6 years federal experience as a scientist, and it is conceivable that I could obtain 40+ (retire at 60+).  However, I do not think that I fall into category (2), as I am not willing to face a financial disincentive towards retirement in my 30s/40s/50s.