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I am contributing as much as I can to my 401k equivalent (federal program TSP) which currently will have a payout of $180.00 per month. I currently contribute 15%; I plan on upping this to 30% again once my furlough is paid for. Does it matter whether I contribute it to Roth version or add it to the one I already have? What are the pros and cons?
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The TSP itself is not an annuity -- it's structured essentially identical to the now-common 401k's available in the commercial sector. Are you referring to the option to buy an annuity from the TSP upon retirement? I believe that is done only once you start making your withdrawals (though I haven't researched that option, so I could be mistaken).
As for traditional vs. Roth, when the TSP begins dispersing withdrawal payments, it pulls proportional amounts from the Traditional & Roth portions of your account... Say you retire with $800k traditional & $200k Roth (80%/20% split), all of your withdrawals will be distributed in the same proportion -- 80% of your withdrawal will be taxed as income, 20% is tax-free. Unfortunately, we don't have the option to selectively draw down one side or the other. Likewise, RMD's will be required based on the full balance, including BOTH traditional & Roth contributions.
The traditional vs. Roth tradeoffs with the TSP are the same as with any other account (IRA, 401k, etc.) -- taxed now at current rates, or taxed later at future rates. However, if you're maxing your TSP, using the Roth can be better simply because it allows you to pack more value in that with the Traditional... it takes $17.5k of income to max the TSP with 100% traditional contributions, but it takes $21,875 of income (assuming 25% tax bracket) to max it out with 100% Roth contributions... effectively, you can get more money into the Roth, so when it comes time to withdraw, the Roth would have a higher value. [of course, that benefit stands upon the assumption that you CAN contribute at such a high rate.] -
Can you help me out with this math...i thought that the max TSP contribution is $17,500 for the year whether it's the roth or traditional version.Originally posted by kork13 View PostComment
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That is correct. Bottom line: it takes more income to max out a Roth than a Traditional account. Happy to explain, and hopefully I can do so somewhat clearly...Originally posted by cooliemae View Post
An individual can contribute up to $17.5k into their Roth TSP account. However, that money is taxed, so in order to add all of that money, it requires having that $17.5k PLUS an additional $4375 for taxes. $17,500+$4,375=$21,875. You are putting in the equivalent of $21,875 in income into your Roth TSP with all of their taxes paid, with none due at withdrawal. Compare that to the Traditional TSP. $17.5k into a Traditional TSP is not taxed, thereby saving you the same $4,375. $17,500-$4,375=$13,125. You have effectively put $13,125 into your account, because come time to withdraw, you will still owe taxes on it.
Thus, two theoretical, identically-invested accounts maxed out at $17,500 for one year then left to grow for 30 years will both end up at the same dollar amount -- let's guesstimate $133k -- in each account. The Roth account has $133k and can be withdrawn with no taxes to give the TSP recipient $133k in pocket. The Traditional account also has $133k in it, but taxes are due on it. Assuming you're in the same 25% bracket (anybody's guess), you only end up with $99,750 in your pocket.
Think of a Roth account as more dense than a Traditional account. You can effectively pack more money into a Roth (if you have the income available to do so), because the taxes are already paid. Yes, with the Traditional account, you had those tax savings... What did you do with them? Hopefully you did something useful like invest it in other accounts, or reduce debt & interest payments, or something else beneficial. Who knows what happened to it...but one thing is for certain -- it's most certainly not sitting in your retirement account earning compounded returns.
In the end, it is still a question of "When do you want to pay taxes, now or later?" Either one can be beneficial. For the average family in the 25% marginal tax bracket, the benefit is a toss-up in either direction, so I would personally recommend going with the "monetarily denser" option of a Roth. That dedicates the most possible money toward retirement, versus tax savings today which may or may not be used for meeting long-term financial needs.Comment
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I follow you...I wasn't taking the tax savings into account....
Personally, I've split the two and aiming to have just enough money coming from the traditional side of the TSP in retirement to fall under the personal deduction limit, thus maximizing current tax savings and future....of course it's a best guess since retirement is 20+ years away....Comment
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That is what I thought but I received a report that says if I retire today, I will get $180 per month - this is what led me to think it might be an annuity. Is the $180 per month based on 4% withdrawal rate or something?Originally posted by kork13 View PostI YQ YQ RComment
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Probably something like that, yes. I forget your age--early 30's? That statement is basically saying that based on your current balance (guesstimating around $60k?), if you were to retire RIGHT NOW, that's the level of income that your portfolio would produce. I got the same statement sometime last year, and found it a little weird... But I suppose it's intended to help people closer to retiring actually plan for their retirement.Comment
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