Splitting Roth & Traditional TSP money

[kork13]

In April or May, the TSP (military's 401k equivalent) is going to start offering a Roth option -- very exciting.
Anyway, I've been trying to figure out the best way to split my retirement savings between the Traditional TSP (tax deferred) and Roth TSP ... or if it's even beneficial to split it at all. This year, I expect I'll be just shy of the line between the 15% / 25% marginal tax brackets, and next year, I'll likely be just above it.

I love my Roth IRA, and I'm really glad to be getting this Roth TSP option. But what do you guys think? Is it best to contribute somewhat to my deferred TSP in order to try to stay below the 25% bracket? In the long view, I see most of my retirement income coming from my Roth accounts, so the taxes I'd pay on the tax-deferred assets would be low. An unknown factor is that if I stay in long enough to retire (I hope to), I'll have a pension that would significantly raise my taxable income. And, of course, unknown future tax rates.

I'm considering 2 options right now... either 100% Roth, or 75% Roth/25% deferred. I max my Roth IRA, but no matter how I split anything, I can't max my TSP... At best, I can only fund it half-way (~$8500/yr). Also of note, there is no match on my TSP contributions.

Bottom line, I guess this is about tax diversification.... what do you guys see as a smart dividing line?

[cooliemae]

I can't wait for the TSP Roth to be rolled out as well. Looking at my personal situation and what my wife and i expect to have with regard to taxable income when we retire, I'm looking at putting little more than 50% of my TSP contributions into the Roth option. This should provide me with a retirement that will have limited taxes due.

I would suggest you estimate how much your taxable retirement benefits will result in when you retire. Subtract the standard deduction (I just used the current one) and see how much income would be taxed. The amount above the standard deduction is what you want to look at replacing with tax free retirement income such as the roth.

[kv968]

I'm considering 2 options right now... either 100% Roth, or 75% Roth/25% deferred. I max my Roth IRA, but no matter how I split anything, I can't max my TSP... At best, I can only fund it half-way (~$8500/yr). Also of note, there is no match on my TSP contributions.

Bottom line, I guess this is about tax diversification.... what do you guys see as a smart dividing line?

I think the 75/25% split would be probably be best. Especially, if as you said, that'll keep you out of the 25% tax bracket. The split might not be exactly to the 25% level but if it's close enough, I'd say go that route.

[jpg7n16]

Kork, just to be sure, when you say you'll be just above the 25% line, are you talking taxable income, or gross income?

Since you're already maxing the Roth outside the plan, I'd likely contribute enough to put your taxable below the 25% bracket. That's prob leaning the 75/25 direction like kv was saying.

But if you were thinking gross income wise, you're likely below the split anyways due to deductions and should go the 100% route

[kork13]

Kork, just to be sure, when you say you'll be just above the 25% line, are you talking taxable income, or gross income?

Yes, taxable income. It's only a rough estimation, but I am thinking I'll be right around the 25% line, so I'm definitely leaning toward taking advantage of the deductible contributions to stay below it.