Advice on retirement savings and new job - TSP vs. Roth TSP

[siggy_freud]

Hey all,

I have accepted a new job with the federal government. As part of their benefits I have options to save for retirement via a traditional Thrift Savings Plan, and a Roth TSP. The regular TSP is tax-deferred, whereas the Roth TSP you pay taxes up front.

I am 30 right now. This job is in federal law enforcement, so after 20 years I can start drawing on my pension if I so chose.

The government will match the first 3% into the standard TSP dollar for dollar, and .50 for the next 2%. I had to submit my elections, which I can change, but to start I just said 5% of my check goes into the standard TSP so I get the full match.

The crux is that we don't yet know what City we'll end up in, and they can range for cheaper (Houston) to places like New York or San Francisco (much more expensive). So we're waiting to find out before we know how comfortable we'll be in regards to paycheck going to retirement.

I can contribute up to $18,000 per year between the accounts, and am curious when it comes time to elect for more money to go into the accounts, if I am better off in the standard TSP, or going with the Roth.

Thanks all!

[cooliemae]

It really depends on what tax bracket you think you'll be in the future and whether you need the tax savings right now. Personally, I've have my TSP split almost in half between the two of them. I want my taxable income when I retire to be less than the standard deduction, or as close to it as possible and the roth lets me do that. Of course, I need some of the tax saving right now, so I split my allocation between the two.

If I remember correctly, the 5% match from the government cannot go into the Roth because the Roth has to have earned income, so you might take that into account as well.

[autoxer]

I want my taxable income when I retire to be less than the standard deduction, or as close to it as possible and the roth lets me do that.

I've always thought I should target having the taxable account provide the sum of the standard deduction, two exemptions and the 10% bracket and use the roth to provide income above that. That seemed like the most tax efficient strategy. Although having pension income in retirement will probably push you up the tax bracket ladder, so that may make the ROTH more attractive.

[siggy_freud]

The pension will push me up, but I'll likely be in a higher bracket during my working years than when I am retired, which makes me think deferring taxes until later might be a good idea. Also possible I'd end up in the same bracket, however it's unlikely we'd be higher once I retire than we are now.

You're right coolie, the 5% match is only for the traditional TSP, not the Roth, so I'll at least be putting 5% into that one to get the free money .

[BadSaver]

Roth

Generally I prefer the Roth.

The argument for an IRA is that you'll possibly be in a lower tax bracket when you retire. Unfortunately there's some complicated tax rules that may put your IRA withdrawals into the "OTHER" income category when you draw social security. The :"OTHER" category is taxed at a higher rate than ordinary income. Also, if you decide to leave the IRA in place it will become subject to Required Minimum Distribution (RMD) at age 70.5. Plus if you die, you'll leave your heir (not spouse) a tax bomb (the IRA) which they'll have to pay the taxes on.

I've seen people get slammed by IRA taxes. Most people don't know about this:

http://joecobbonline.wordpress.com/2007/03/19/the-tax-on-your-retirement-savings/

Do your own due diligence...

[autoxer]

Unfortunately there's some complicated tax rules that may put your IRA withdrawals into the "OTHER" income category when you draw social security. The :"OTHER" category is taxed at a higher rate than ordinary income.

Do you have any other info on this 'OTHER' tax?

The joe cobb article is more conspiracy theory than useful information.

[siggy_freud]

Generally I prefer the Roth.

The argument for an IRA is that you'll possibly be in a lower tax bracket when you retire. Unfortunately there's some complicated tax rules that may put your IRA withdrawals into the "OTHER" income category when you draw social security. The :"OTHER" category is taxed at a higher rate than ordinary income. Also, if you decide to leave the IRA in place it will become subject to Required Minimum Distribution (RMD) at age 70.5. Plus if you die, you'll leave your heir (not spouse) a tax bomb (the IRA) which they'll have to pay the taxes on.

I've seen people get slammed by IRA taxes. Most people don't know about this:

http://joecobbonline.wordpress.com/2007/03/19/the-tax-on-your-retirement-savings/

Do your own due diligence...

Apologies for the ignorance here, but not sure how IRA applies to my situation, as I'm choosing between two TSP accounts at the moment. I always assumed they are different than a TSP . . .

[BadSaver]

Tsp

TSP (Traditional), 401K, & Traditional IRA (IRA) are tax deferred. TSP (Roth) and Roth IRA (Roth) are not tax deferred.

When using the term IRA, I was referring to the class of tax deferred retirement vehicles. Laziness...sorry to be unclear.

Thinking your retirement package is FERS, TSP, & Social Security. Nice...

FERS = Deferred compensation, TSP = Defined contribution

I believe the article to be genuine. I first saw it in a newspaper years ago. Within the 1040 instructions, the social security worksheet, it looks like IRA distributions are involved with the tax on social security. It would suck if one leg of your retirement package (TSP) beats on the other leg (social security). Do your own diligence. I don't know your situation... Just throwing out food for thought.

I've converted almost all my (and wife's) retirement savings to Roth accounts. Therefore removing the tax on withdraw from the retirement equation. I believe $1 in a Roth is worth more than a $1 in an IRA. Plus there are more restrictions on IRA withdraws. Also, I feel more protected against future tax increases in a Roth. Who knows what will happen when social security runs low on money. I'm working on my second deferred compensation package, which will be taxable in retirement. Gonna be hard to fly under the tax radar...

Congrats on the new job!

[GrimJack]

Hey all,

I have accepted a new job with the federal government. As part of their benefits I have options to save for retirement via a traditional Thrift Savings Plan, and a Roth TSP. The regular TSP is tax-deferred, whereas the Roth TSP you pay taxes up front.

I am 30 right now. This job is in federal law enforcement, so after 20 years I can start drawing on my pension if I so chose.

The government will match the first 3% into the standard TSP dollar for dollar, and .50 for the next 2%. I had to submit my elections, which I can change, but to start I just said 5% of my check goes into the standard TSP so I get the full match.

The crux is that we don't yet know what City we'll end up in, and they can range for cheaper (Houston) to places like New York or San Francisco (much more expensive). So we're waiting to find out before we know how comfortable we'll be in regards to paycheck going to retirement.

I can contribute up to $18,000 per year between the accounts, and am curious when it comes time to elect for more money to go into the accounts, if I am better off in the standard TSP, or going with the Roth.

Thanks all!

The match will be an annuity; when you retire, you will be allowed to convert your TSP into the annuity. This coming year I am going to sign up for the FED retirement class (costs $100.00 but I have been told it is worth it.) My first questions will be about the annuity stuff like what are the fees to buy into the annuity, and what the different payout options are.

Another thing about the city you live in; there are different LOCALITY PAYMENTS depending on what city you work in; I work in Seattle and there is a 21.81% added to my paycheck. Base pay for a GS8 is 38387 and that becomes 46296 with locality payment. the locality pay scales are here so once you know where you will be stationed you can figure out what your pay will be.

[BadSaver]

IRA vs Roth

Thinking through the IRA (TSP Traditional) vs Roth (TSP Roth) problem.

Step 1:
Given a 15% constant income tax, they both pay the same amount of income taxes. Assuming a $100 deposit:

IRA Deposit = $100; $100 then grows (assume x 10)= $1,000; $1,000 - (15% x 1000) = $850 taxed
Roth Deposit = $100 - (15% x 100) = $850; $850 then grows (assume x 10) = $850

Mathematically, all variables the same. The formulas lead to the same amount. IRA vs Roth = tie.

Step 2:
Given income tax rate is not constant, then the outcomes are different.
If you assume you income taxes will be less when you retire, the IRA wins.

Step 3:
What are the complications in withdrawing IRA funds: taxation, RMD, Social Security, inheritance etc. Therefore, I think Roth wins.

Step 4:
Given the future is unknown, which one looks more secure from future taxation?
I think the Roth wins again.

My previous comments were focused on analysis of step 3 and 4. I assumed step 1 and 2 were covered.

[BadSaver]

TSP Generalities

The TSP is very cost effective. The charge is well below that of other investment companies. The G-Fund provides participants unique access to the Government securities rate. The other funds are indexes or combinations of indexes, which in itself simplifies things and removes manager risk.

The thing I don't like about it is the lack of variety, especially bonds. There's one bond fund - the F-fund.

Getting your money out - there's lots of decisions.

https://www.tsp.gov/PDF/formspubs/tspbk08.pdf

[Like2Plan]

Hey all,

I have accepted a new job with the federal government. As part of their benefits I have options to save for retirement via a traditional Thrift Savings Plan, and a Roth TSP. The regular TSP is tax-deferred, whereas the Roth TSP you pay taxes up front.

I am 30 right now. This job is in federal law enforcement, so after 20 years I can start drawing on my pension if I so chose.

The government will match the first 3% into the standard TSP dollar for dollar, and .50 for the next 2%. I had to submit my elections, which I can change, but to start I just said 5% of my check goes into the standard TSP so I get the full match.

The crux is that we don't yet know what City we'll end up in, and they can range for cheaper (Houston) to places like New York or San Francisco (much more expensive). So we're waiting to find out before we know how comfortable we'll be in regards to paycheck going to retirement.

I can contribute up to $18,000 per year between the accounts, and am curious when it comes time to elect for more money to go into the accounts, if I am better off in the standard TSP, or going with the Roth.

Thanks all!

Congrats on your new job!
As cooliemae said, it really depends on what your income tax bracket is now and what you expect it to be in retirement.
Would making the traditional contributions put you into a lower tax bracket? When you pull the money out of the TSP, do you think you will be a higher or lower tax bracket?

Another point that cooliemae made is that your match (and subsequent earnings on the match) is pretax no matter which option you pick. Currently, there is no provision for withdrawing only the pretax or only the Roth portion.

With both a pretax match and a Roth balance in your TSP account, any withdrawals you make will be paid proportionally from each balance (and taxed accordingly). So, you give up a little bit of control on how you receive your money. (One way to keep the pre-tax and Roth money separate is to contribute pretax (traditional) to TSP and set up a separate Roth account for your Roth contributions).

[BadSaver]

Would making the traditional contributions put you into a lower tax bracket?

I don't think this would matter. It only matters what the tax on the contribution is because of the progressive nature of the tax system. The dollars up to the contribution amount are taxed the same whether the contribution is made or not.

[siggy_freud]

Thanks all for the advice.

Badsaver, I can see how the two would balance on a single deposit, but over time wouldn't the traditional TSP theoretically be more beneficial, as the compounding interest on MORE money going in initially would net a larger overall balance at the end. Assuming the tax rate was the same at withdraw time, I would think the traditional would be a better choice.

I'll be on the Foreign Service Pension System (FSPS), so it will be FSPS + TSP + SS I believe, but because it'll be in law enforcement I could retire with FSPS at 50, but TSP and SS wouldn't fully kick in until 5-13 years later.

Grim, the federal match doesn't say anything about being an annuity. The only language from the department and TSP pages just talks about options I have to withdraw, including an annuity, lump sum, and set payments until the account is empty.

I won't know my locality pay rate for a few months, but I'll be getting the base 16% in addition to the base salary. I'll also be getting LEAP pay. I'll be on the FS payscale, not the GS pay scale. Similar, but they work a bit differently from what I've ready.

[cooliemae]

You can purchase an annuity with all or part of the money in your TSP. You will also have the option to set-up a monthly withdrawal based on life expectancy or set a defined amount you want each month.

So you might want to take more out of your TSP to supplement your pension before you take SS and then when SS kicks in you can scale back your TSP withdrawals.