ROTH TSP, TRADITIONAL OR VANGUARD

[cpostache]

I'm a future mustachian who has no idea where to begin with investing.  My wife and I have finished paying off our last credit card this month.  We have a mortgage that is nearly paid in full by our tenants.  We also have a low-interest auto loan with a balance of $16,000.  Other than that, we have standard bills such as auto insurance, rent, utilities, etc.

I am an active duty service member with 5 years remaining until I retire.  If I do not advance again, I'll retire as an E-7.  I'd like to think I'll advance, but would like to plan as if I will not.  My pension once I retire should be between $1,700 to $2,000 per month beginning the month after I retire.  We are stationed overseas.  My expenses and disposable income fluctuate from month-to-month, but I will have $2,500 to $3,000 remaining each month after all expenses are paid.

I am contributing a modest $500 per month to ROTH TSP.  But the more I read on this blog, the less confident I am that I'm making the right decision.  I would like to permanently retire as young as possible.  With that in mind, I plan to begin investing $2,000 to $2,500 per month beginning in June. 

My questions are:  Should I increase my ROTH contributions?  Switch to traditional TSP and plan to roll that money into a ROTH account once I've reached early retirement?  Explore other options such as Vanguard?

I look forward to reading your advice!  Thank you.

[forummm]

We'll need more info to help. For example, the choice between Roth or Traditional contributions depends a lot on your current income and what you think your tax rate will be like in retirement. It's quite possible that a traditional contribution would be better for you. The best thing you can do is to start saving more money, no matter where you're saving it. Maxing out your retirement accounts ($18k TSP and $5.5k IRA) is the beginning.

[Indexer]

Regardless of what you do... open a Roth IRA and put some money in it.  Roth accounts(401ks, TSPs, IRAs, etc.) have a 5 year rule around withdrawals that starts on Jan 1st of the year you make the "first" contribution.  When Roth employer plans(401k/TSP) were created Congress didn't bothered to include a rule that time spent in a Roth employer plan counted towards the 5 year rule on the Roth IRA if you rolled the employer plan into the IRA.  You could be in a Roth 401k or Roth TSP for 10 years, roll it into a brand new Roth IRA... and it counts as day 1 for that 5 year rule(so you lose the 10 years).  However if you opened a Roth IRA and put $100 in it 10 years ago the whole thing is treated as if you owned it even if you just transferred $100k into it(exception:  conversions from pre tax accounts like traditional IRAs always get a new 5 year clock).  This isn't a strategy, its just a good to-do for anyone who has a Roth TSP or Roth 401k to avoid frustration if you roll it into a Roth IRA in the future.


So Roth VS traditional relies on a couple things.  1. tax bracket.  Higher tax bracket traditional normally looks better.  Lower, roth normally looks better.  2.  do you want/need to do a roth conversion ladder?

More information on Roth conversion ladder:  http://forum.mrmoneymustache.com/ask-a-mustachian/the-millionth-%27roth-conversion-ladder%27-question/

If you want to do a Roth conversion ladder you actually want more money in traditional(pre-tax) assets so it is available for the Roth conversion ladder when you retire early.

Vanguard is a good place to open an IRA, roth or traditional... or even a taxable(non-IRA) individual account.  If you are new to investing the following is a good page to read.  https://personal.vanguard.com/us/insights/investingprinciples

You should probably read all 4 principles.  I still go look at principle 2: Balance just so I can look at that risk/return chart with the different allocations going from 100% bonds to 100% stocks.  Might be my favorite chart in the whole world.  Makes determining risk tolerance easy. 

source: (Vanguard) https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

Look at the worst year number first.  Start in the bottom right corner at that big -43.1%.  Imagine you lost that % this year on your money.  If that looks scary or would undermine your goals work your way left until you find a number that isn't scary.  If you get to -18.4% you probably went too far unless its a short term goal.  Its perfectly normal for money set aside for a house down payment(or similar) to be conservative, but any money set aside for 20+ years(like income during your entire retirement) should probably be at least 50% stock.

I hope that helps, and I hope it isn't too much homework.

[NICE!]

YELLING, CAPS LOCK OR SCREAMING

[cpostache]

We'll need more info to help. For example, the choice between Roth or Traditional contributions depends a lot on your current income and what you think your tax rate will be like in retirement. It's quite possible that a traditional contribution would be better for you. The best thing you can do is to start saving more money, no matter where you're saving it. Maxing out your retirement accounts ($18k TSP and $5.5k IRA) is the beginning

Thank you, Forummm.

My annual taxable income is $49,500.  My actual income will be $90 to $100k (includes housing allowance, COLA, etc.).  Roughly $20,000 of that goes towards housing and related expenses while living in Europe.  I am married and have two small children.  My wife is a stay at home mom until both children are school aged.

We have a mortgage of $1,020 on a property from one of my previous assignments.  After paying the property manager, I receive $920 in rent.  It is a 15 year mortgage with 12 years remaining.  Our auto loan payment is $450 per month.

I'm thinking traditional makes more sense for us for at least as long as I remain in the military because so much of my income is not taxed.  But would really like to hear what you guys have to say in terms of what strategies might work best for my family and  I.

[cpostache]

I hope that helps, and I hope it isn't too much homework.
[/quote]

Thank you, Indexer.

This definitely helps and isn't too much homework.

[forummm]

Not sure if by taxable you mean you get taxed on that amount, or if you get taxed on the amount that's left after you subtract your deductions and exemptions from that amount. But it sounds like you're in the 15% marginal bracket. If you think you'll be in that bracket when you're retired, then Roth could make sense. If you think you'll be in the 0% or 10% bracket, than traditional could make sense.

Since you'll retire as an E-7 (captain or equivalent if I remember right???), I think that's a pretty decent taxable pension. So perhaps Roth is a good way to go. It sounds like you might be in the same tax bracket after retirement.
EDIT: Doh! I was thinking O-7! So maybe your pension would be pretty small then. So I'm not sure what to suggest for that. Do you know what your taxable pension will look like?

Congrats though! It sounds like you're pretty close to retiring.

[SomedayStache]

I'm no expert - but to me it seems like the Roth TSP might be better for you than the Traditional TSP.  Basically right now you are only taxed on half of your income.  You are taxed on $50,000 but have closer to $100,000 to live on. 

State taxes are also a big deal - but most active duty personnel manage to claim their state of residence to be a state that doesn't tax them (Florida, Texas, etc.).  If you are still claiming Oklahoma then Oklahoma doesn't tax your military income. 

Right now you are (probably) paying $0 in state taxes and pay federal income tax on only half of the $100,000 you are living on.  You also have young children so are getting tax deductions for them right now. Doesn't it seem like the Roth TSP is a no brainer here? 

But maybe I'm wrong - because nobody else is chiming in with this viewpoint.  WHat am I missing?  Any chance you want to share the actual $amount you paid in federal/state taxes for 2014?