Normal TSP or the New Roth TSP?

[MomTo2Boys]

I've been reading this great thread that's concurrently going:

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

And I wanted to sort of re-fashion it for federal employees.

So I'm wondering, now that the TSP folks have just rolled out the new Roth TSP option, if going TSP normal (tax-deferred) or TSP Roth is preferable?

[sophie]

You might want to run some scenarios for yourself.  I used the future value calculator on dinkytown.net to figure the retirement plan balances at retirement, and nothing more than basic math was needed for everything else.

The tax-deferred account will win under the scenario I used.  That's because the amount you end up with in tax-deferred is so much greater, it will surmount almost any foreseeable tax rate.  The tax rate I assumed for the non-deferred savings was low (5%), and even if it were 0 it wouldn't have changed the outcome.
 
You may end up deciding to put some fraction like 1/4 or 1/3 into the Roth, as others have indicated they do, but you probably shouldn't do it at the expense of your tax-deferred contributions.

Good luck, and let us know what you find out!

[Tortoise]

Oh, and one more thing just in case anyone other than me cares about the Roth TSP vs. tax-deferred TSP thing... I'm having a DEVIL of a time trying to work through the question by using online calculators, because all of them limit the Roth contributions to $5,000 and none of them will let me type in the TSP's higher max Roth contribution ($17,000/yr), because that's outside their pre-programmed Roth limit parameters.

Have you tried dividing all of the dollar amounts by some scale factor (for example, 4) before you enter them into the online calculators so that the pre-programmed Roth limit of $5,000/year won't get in your way? Then you'd just multiply the end result back up by the same scale factor.

[sophie]

Fascinating!!  Would you tell us what your assumptions were for tax rates before & after?  It would be interesting to see if a small tweak makes such a huge difference in a Roth vs tax-deferred investment decision.

I did the calculations by hand because I missed the dinkytown 401K vs Roth calculator.  Duh!!!  It at least agrees with my numbers, so I don't think I made any mistakes.  It doesn't have that $5,000 limit to contributions, so you might try that if you like.  Knocking off a zero will work also.

[sophie]

I'm a bit confused...did you forget to insert the table, or did it not show up?

How does the government TSP work?  With 401Ks, you put in pre-tax money, so your election comes out of your paycheck before taxes are figured.  With a Roth, taxes are figured and then you get to make your contribution.  So the Roth contribution is necessarily lower than the 401K equivalent.

If you assume your tax rate is the same throughout, then the calculator tells you that the Roth comes out slightly ahead.  If your tax rate is 5% higher after retirement, then the Roth's advantage is 10% over the 401K.  But, there's a critical difference to consider.  With the 401K, the deferral amounts are calculated from your marginal tax rate, which is your top tax rate for federal + state + local.   When you go to withdraw, not all the money will be taxed at your marginal rate.  They're going to be subject to a progressive rate structure, i.e. for Federal the first $14,800 (if married, both >65, no dependents) is free, the next $17,400 is taxed at 10%, and so on.  

Obviously if you have other significant income sources, you'd count that first, and that may have you paying the top tax rate on your 401K withdrawals.  Otherwise, your effective tax rate will be quite a bit lower than the top rate.  So that Dinkytown calculator is a bit misleading.

It would definitely be useful to have both a Roth and tax-deferred account available, as several others have pointed out.  So you might want to split the difference:  figure what percentage of your income you want to save pretax, then put half of that into the standard TSP, and the other half (after taxes) into the Roth.

[sophie]

I feel like Dr. McCoy in the original Star Trek:  "I'm a doctor, not a .... "!

It might be worth your finding a good tax accountant and consulting about your situation.  In particular, one who is very familiar with your type of situation.  It's clearly not an easy decision, and one you don't want to make lightly.

Even if pensions were outright abolished, it's likely it would only apply to new hires.  I see now why you think your tax rate will be as high in retirement.  It sounds like in that case, the Roth is the right move.  You might find out what your husband's coworkers are doing.  And, there must be a forum somewhere with lots of people weighing in on how to handle government retirement savings.

You might also consider not putting the maximum in the Roth, in order to keep part of your savings in taxable where you can get at it easily before age 59.  Many government employees can retire and start taking pensions well before that age - not that I enjoy hearing about someone younger than me living the good retired life on my nickel, but it is part of the deal you signed up for.

[Greg]

I'm working for the federal government and I'm invested into the Roth TSP (and 5% into Traditional TSP for the matching contributions).

I'm still not fully convinced on why you would want traditional versus Roth. I mainly look at the argument for the Roth as yes I may pay taxes in the beginning on it and my tax rates might be lower than when I start pulling money out so it might be worthwhile to have your hand in both buckets of traditional and Roth just in case.

What gets me though is that with the Roth contributions, my earnings on those contributions grow tax free and those are going to be the values that exponentially take off in the future (hopefully). Perhaps there is a method to determine what rate of growth you would need of earnings/dividends to actually offset the savings you could potentially have if the tax rate you are in when you start pulling the money out is lower than the tax bracket you are in when putting the money in.

On a random note, I started work about a month and a half ago and I'm trying to reach as close to $17k contribution limit before the end of the year so my last paycheck was for $0 (because 5% went into Traditional and 95% went into Roth). Retirement here I come!

[MomTo2Boys]

I'm working for the federal government and I'm invested into the Roth TSP (and 5% into Traditional TSP for the matching contributions).

It is my understanding that even if you put all $17,000 into the Roth, that you still get the 5% matching automatically, but that the matching portion goes into the traditional side. Maybe I am mistaken? But that's my understanding from the TSP literature I read.

[Greg]

I'm working for the federal government and I'm invested into the Roth TSP (and 5% into Traditional TSP for the matching contributions).

It is my understanding that even if you put all $17,000 into the Roth, that you still get the 5% matching automatically, but that the matching portion goes into the traditional side. Maybe I am mistaken? But that's my understanding from the TSP literature I read.

I'll have to look into again now but I believe I called TSP at one point and asked this very question and they said that for the matching contributions, it has to be put into the traditional TSP. I'll double-check on this though just so I'm not putting false information on this forum.

[MomTo2Boys]

I'm working for the federal government and I'm invested into the Roth TSP (and 5% into Traditional TSP for the matching contributions).

It is my understanding that even if you put all $17,000 into the Roth, that you still get the 5% matching automatically, but that the matching portion goes into the traditional side. Maybe I am mistaken? But that's my understanding from the TSP literature I read.

I'll have to look into again now but I believe I called TSP at one point and asked this very question and they said that for the matching contributions, it has to be put into the traditional TSP.

Oh, wow! Yes, that would be great to know, because here I've been all thinking that you could totally put the $17,000 all in the Roth and still get the matching. That's a pretty important detail, LOL! I swear I thought I read somewhere in the literature that they said you could put it all in the Roth and still get the matching, but since you've actually called and talked to them, well, that carries a lot more weight than just some vague recollection of mine!

[MomTo2Boys]

It is my understanding that even if you put all $17,000 into the Roth, that you still get the 5% matching automatically, but that the matching portion goes into the traditional side. Maybe I am mistaken? But that's my understanding from the TSP literature I read.

I'll have to look into again now but I believe I called TSP at one point and asked this very question and they said that for the matching contributions, it has to be put into the traditional TSP.

Oh, wow! Yes, that would be great to know, because here I've been all thinking that you could totally put the $17,000 all in the Roth and still get the matching. That's a pretty important detail, LOL! I swear I thought I read somewhere in the literature that they said you could put it all in the Roth and still get the matching, but since you've actually called and talked to them, well, that carries a lot more weight than just some vague recollection of mine!

Okay, so, here's the tsp web page with the sentence that made me believe that even going exclusively with the TSP Roth would still count toward getting the matching contributions:

https://www.tsp.gov/planparticipation/e ... ions.shtml

It's the part where it says: "If you are FERS, your Agency Matching Contributions are based on the total amount of money (traditional and Roth) that you contribute each pay period.  All agency contributions are deposited into your traditional balance."

That's what made me think that even if you went with all $17,000 into the Roth, that you would still get the matching contributions, but that the matching contributions themselves would always go into the traditional side (since that money has not yet had taxes paid upon it). Of course, that assumes that the person interested in doing such a thing is FERS. It doesn't discuss other fed types on that page.

[MomTo2Boys]

And I swear I'm not trying to bore everyone to death and/or drone on and on forever, but I found this official TSP bulletin within which it seems to state (on page 3) that Roth contributions are just like traditional contributions in regards to calculating matching funds:

https://www.tsp.gov/PDF/bulletins/12-9.pdf

In fact, this above-linked-to TSP document says *nothing* (that I can find) about FERS vs. other employees. It seems to be this way for everyone participating in the TSP, across the board.

But you know what? We'll be the guinea pig. I just went all-in 100% Roth TSP for this next pay period, and so if it turns out that we don't get the matching funds on this next paycheck because we're only in the Roth, I'll report back. It'll also be reallllly interesting to see just how big a hit going from maxing out ($654 per paycheck) 100% TSP pre-tax to 100% TSP after-tax is to my husband's take home pay. I already checked the IRS 1040 tax scales and it looks like, with our income, going entirely from $17,000 pre-tax to $17,000 post-tax would cost us roughly $4,000+ more a year in federal taxes...

[Greg]

And I swear I'm not trying to bore everyone to death and/or drone on and on forever, but I found this official TSP bulletin within which it seems to state (on page 3) that Roth contributions are just like traditional contributions in regards to calculating matching funds:

https://www.tsp.gov/PDF/bulletins/12-9.pdf

In fact, this above-linked-to TSP document says *nothing* (that I can find) about FERS vs. other employees. It seems to be this way for everyone participating in the TSP, across the board.

But you know what? We'll be the guinea pig. I just went all-in 100% Roth TSP for this next pay period, and so if it turns out that we don't get the matching funds on this next paycheck because we're only in the Roth, I'll report back. It'll also be reallllly interesting to see just how big a hit going from maxing out ($654 per paycheck) 100% TSP pre-tax to 100% TSP after-tax is to my husband's take home pay. I already checked the IRS 1040 tax scales and it looks like, with our income, going entirely from $17,000 pre-tax to $17,000 post-tax would cost us roughly $4,000+ more a year in federal taxes...

I looked at your links. Thanks for posting. It's looking like you are right but I'd be interested in whether you get the contributions as you said for your experiment. I might call again tomorrow. Perhaps I heard wrong or the person on the other end didn't fully know how the new Roth worked. I'll let you know if I find anything out from the call.

[Greg]

MomTo2Boys,

Have you figured out whether you get the 5% matching even if you don't contribute to the traditional TSP and only to the Roth TSP by looking at your paystub yet?

[MomTo2Boys]

MomTo2Boys,

Have you figured out whether you get the 5% matching even if you don't contribute to the traditional TSP and only to the Roth TSP by looking at your paystub yet?

Hey, Greg,

I went on the EE website (ya know...) and I pulled up my husband's latest pay stub. Everything is exactly the same as the previous pay periods - the $654 maxout TSP from my husband, the 1% Agency Matching from them and the other larger Agency Matching from them. No difference at all this pay period from any other pay period in terms of amounts or anything.

But I'm not 100% going to call the experiment done/successful, though, because until the money shows up in the TSP account as having been Roth money, I can't be completely sure that the change I made that week or two ago had taken effect for the pay period whose stub I'm looking at. Truth be told, when I was reconfiguring the Traditional to Roth amounts on the EE website (ya know...), the system gave me a whole lot of problems (bugs, errors, etc.), so I'm going to wait on calling it successful. I'll report back when that latest paycheck money shows up in the TSP account as having truly been designated Roth money. When is that- does this latest paycheck's TSP money hit the TSP website next Friday? Do you know? I've never paid close enough attention to know what exact date it hits on. But, thus far, the whole thing looks promising...

[Greg]

Sounds good, keep me posted. As as for actually having the TSP deposit, I have a feeling it is almost a pay period offset from the actual pay period it seems. I get my statement but when checking TSP it looks like it takes far longer to actually deposit. Not sure why. I'm assuming it's a conspiracy hah

[MomTo2Boys]

Sounds good, keep me posted. As as for actually having the TSP deposit, I have a feeling it is almost a pay period offset from the actual pay period it seems. I get my statement but when checking TSP it looks like it takes far longer to actually deposit. Not sure why. I'm assuming it's a conspiracy hah

Good news! I hit the TSP website and my husband's contribution was, in fact, entirely 100% Roth and he DID get the entire Agency Matching Contribution, so I would call the whole experiment successful. I can now declare that you can, in fact, contribute 100% to the Roth and still get the full Agency Matching Contributions, which themselves end up in the tax-deferred account.

[Greg]

Sounds good, keep me posted. As as for actually having the TSP deposit, I have a feeling it is almost a pay period offset from the actual pay period it seems. I get my statement but when checking TSP it looks like it takes far longer to actually deposit. Not sure why. I'm assuming it's a conspiracy hah

Good news! I hit the TSP website and my husband's contribution was, in fact, entirely 100% Roth and he DID get the entire Agency Matching Contribution, so I would call the whole experiment successful. I can now declare that you can, in fact, contribute 100% to the Roth and still get the full Agency Matching Contributions, which themselves end up in the tax-deferred account.

MomTo2Boys,

If I were an admin I'd give you a gold star for the day. Thank you for following up on the experiment. Much appreciated. The only thing I'm wondering now is whether 100% Roth is a good thing or not hah. There's other threads on this forum for the positives and negatives of if you are in a lower tax bracket when you retire, you might not end up paying any income tax at all. Now granted this is with current tax laws and I expect taxes to rise for everyone as we all get older. Stating that, I'm banking towards Roth but not sure if I should be 100% banking on a Roth.

Gotta diversify the tax treatments I suppose...

Thanks again.

[Pointedstick]

There's other threads on this forum for the positives and negatives of if you are in a lower tax bracket when you retire, you might not end up paying any income tax at all. Now granted this is with current tax laws and I expect taxes to rise for everyone as we all get older. Stating that, I'm banking towards Roth but not sure if I should be 100% banking on a Roth.

Gotta diversify the tax treatments I suppose...

Thanks again.

Keep in mind state income tax too. Even if the current tax rates are extended in perpetuity and you qualify for no income taxes on your investment capital gains, you'll need to live in one of the handful of states with no income tax to really beat the Roth.

[Greg]

Keep in mind state income tax too. Even if the current tax rates are extended in perpetuity and you qualify for no income taxes on your investment capital gains, you'll need to live in one of the handful of states with no income tax to really beat the Roth.

Gotcha I forgot about that. Thinking of that though, if you contributed to a Roth IRA or TSP in a no state income tax state like Texas, but moved to California when I retire where this is high state income tax, do you not have to pay this at all because you "technically" paid your state income tax (i.e. nothing) while you were in Texas?