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Posted: 8/17/2015 4:40:20 PM EDT
Background I'm 33, no kids, steady girlfriend(maybe next Christmas ill buy some coal that was chemically altered), and about 105K a year income. House has 7 years left on it and I'm comfortable putting down 3 extra principal only payments a year.(I bought a cheaper house).

So coworker and I were talking and apparently I can put 18000 into my traditional TSP every year(plus employer 5% plus automatic 1%) and with 27 years left that is a heft chunk of change. When the TSP offered the ROTH TSP I started putting 12000 (numbers adjusted for annual 500 increases),  and 6k in the ROTH side. By my understanding I can put 18K in the ROTH side and never touch the traditional side as long as I don't exceed my personal contributions going over 18000.  I can also have a non government Roth with a 6k limit right?

What would be the ideal mix? Should I mix TSP ROTH and traditional TSP(taxed at pull out time), or just straight TSP traditional, straight TSP ROTH?
Link Posted: 8/17/2015 7:20:28 PM EDT
[#1]
Max out the ROTH, the advantage of roth is the gains you get from growth (which in retirement, will represent a larger percentage of your portfolio than what you contributed) is not taxed, saving you a buttload of money.
Link Posted: 8/17/2015 9:41:34 PM EDT
[#2]
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Quoted:
Max out the ROTH, the advantage of roth is the gains you get from growth (which in retirement, will represent a larger percentage of your portfolio than what you contributed) is not taxed, saving you a buttload of money.
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I'm not sure I understand what you're saying here... can you clarify?
Link Posted: 8/18/2015 8:53:47 AM EDT
[#3]
Traditional gets taxed upon withdrawal, which means that both your contributions as well as the growth of your investments gets taxed, with ROTH only the contributions get taxed, the growth is yours to keep in full in retirement.



In short, roth accounts pay less in taxes in the long run which lets you keep more of the money in them.
Link Posted: 8/18/2015 2:55:12 PM EDT
[#4]
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Quoted:
Traditional gets taxed upon withdrawal, which means that both your contributions as well as the growth of your investments gets taxed, with ROTH only the contributions get taxed, the growth is yours to keep in full in retirement.

In short, roth accounts pay less in taxes in the long run which lets you keep more of the money in them.
View Quote

Let me expound on this a bit...

For starter's, 401k/TSP are employer-sponsored retirement plans with the TSP (Thrift Savings Plan being the .gov version of a 401k). IRAs are personal accounts. Both 401k/TSP and IRAs have traditional and Roth versions, just with different yearly maximum contribution limits. For 2015, 401k/TSP accounts are limited to $18,000 in employee contributions and IRAs are limited to $5,500.

A traditional account is not taxed when funds are deposited. This reduces your current year's taxable income. However, upon withdrawal in retirement, all withdrawals (contributions and interest earnings) are taxed at the retiree's current tax rate.

A Roth account uses funds that are taxed at the individual's current tax rate. However, upon withdrawal, there are no taxes taken out at all.

When looking at contributions, it costs more to contribute to a Roth because that money is already taxed. So at an average 30% tax rate (federal + state + Soc. Sec. + Medicare, etc.), it will take about $7,800 gross earnings to make up the $5,500 after taxes. But now that the money is taxed, it has decades to grow with compount interest and those earnings will never be taxed. Roth accounts have more and more benefit the longer you can leave the money in there and the better returns you get with your investments.

The balance you select depends on what your current tax rate is and what you expext your tax rate to be in retirement. Typically, your retirement tax rate will be lower, but you also never know what the feds will do with tax rates.

I'm currently 25 y.o. and am contributing to Roth accounts (TSP and IRA) exclusively. I plan to begin mixing in traditional contributions in my mid-30s.
Link Posted: 8/19/2015 7:50:07 AM EDT
[#5]
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Quoted:
Traditional gets taxed upon withdrawal, which means that both your contributions as well as the growth of your investments gets taxed, with ROTH only the contributions get taxed, the growth is yours to keep in full in retirement.

In short, roth accounts pay less in taxes in the long run which lets you keep more of the money in them.
View Quote

I know the basics, I wanted a better explanation of why you think that. I don't think it works the way you think it is. I'm going to give you 3 basic scenarios that show the difference.

#1 Tax rates are equal during contribution and during retirement, lets say 25%
You have $5,000 to contribute
If you put it in a Traditional IRA/TSP you have $5k that grows at the market avg 8% for 40 years $108,622.61, upon withdrawal it's taxed at 25% leaving you with: $81,466.96
If you put it in a Roth IRA/TSP you are taxed up-front so you only put in $3750, that grows at the market avg of 8% for 40 years and you end up with: $81,466.96

#2 Tax rate during career is higher than retirement, lets keep career at 25% and retirement at 15%
If you put it in a Traditional IRA/TSP you have $5k that grows at the market avg 8% for 40 years $108,622.61, upon withdrawal it's taxed at 15% leaving you with: $92,329.22
If you put it in a Roth IRA/TSP you are taxed up-front so you only put in $3750, that grows at the market avg of 8% for 40 years and you end up with: $81,466.96

#3 Tax rate during retirement is higher, lets keep retirement at 25% and career at 15%
If you put it in a Traditional IRA/TSP you have $5k that grows at the market avg 8% for 40 years $108,622.61, upon withdrawal it's taxed at 25% leaving you with: $81,466.96
If you put it in a Roth IRA/TSP you are taxed up-front so you only put in $3750, that grows at the market avg of 8% for 40 years and you end up with: $92,329.22

As you can see, if we don't factor in other tax/income implications other than the basic tax rate, the 2 are completely equal. Your contribution is taxed up-front, or your withdrawals are taxed on the back end, it doesn't matter much which way it's done. The reason they are equal is because even though your withdrawals are tax-exempt on the back end with the Roth options the overall account balance you have to "grow" is reduced by taxes on the front end, which sets it back.

So, what are the advantages then? A few that I know of are outlined below...

As you can see from my examples the prime advantage is that if you can reliably predict your tax rates during retirement and compare them to your rates now you can work the angle that is best for you. Of course it's impossible to reliably predict what the tax rates will be in 40 years so either option is a crapshoot if you currently fall in the middle of the road on the tax bracket. If you're really high on the bracket now then you're reasonably assured that your rates will LIKELY be lower in retirement, if you're reasonably low on the bracket and you're maxing contributions then you can be reasonably sure your rates will be higher in retirement.

The above examples and explanation completely neglect the fact that the tax brackets are a scaled system, your withdrawals on a traditional IRA won't automatically all be taxed at the rate at which you fall, it's the scaled tax bracket, whereas your contributions on the front almost always fall in with the highest bracket you're in (because that is where they reduce the tax burden if you choose traditional over Roth). This offers an immediate advantages to traditional if you will be in the same tax bracket during retirement. A more detailed description of the tax implications would need to be done to show the real benefit.

Also worth mentioning is if you can qualify for other tax exemptions etc now by reducing your income it may be more advantageous to go traditional so your contributions reduce your net income. IE, last year I worked in Afghanistan and made some extra dough, our combined household income would have disqualified us from the child tax credit but I maxed my traditional contributions to reduce my income enough that we still earned most of the child tax credit...

There are other advantages as well, I'll add them as I think of them...
Link Posted: 8/19/2015 5:11:19 PM EDT
[#6]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
I know the basics, I wanted a better explanation of why you think that. I don't think it works the way you think it is. I'm going to give you 3 basic scenarios that show the difference.

#1 Tax rates are equal during contribution and during retirement, lets say 25%
You have $5,000 to contribute
If you put it in a Traditional IRA/TSP you have $5k that grows at the market avg 8% for 40 years $108,622.61, upon withdrawal it's taxed at 25% leaving you with: $81,466.96
If you put it in a Roth IRA/TSP you are taxed up-front so you only put in $3750, that grows at the market avg of 8% for 40 years and you end up with: $81,466.96

[snip]
View Quote

Your examples aren't correct though. You can put $5,500 into either traditional or Roth. Putting $5,500 into traditional will cost you $5,500 because the contributions are not taxed. Putting $5,500 into Roth will cost you roughly $7,800 assuming a tax rate of 30% (effective fed income tax + state income tax + Soc. Sec. tax + Medicare tax). Assuming you have the $7,800 today, you will end up with more in retirement.

Say you contributed to Roth for 30 years and it costs $7,800 to make the $5,500 contribution. Using an 8% rate of return, a 25% tax bracket while working, and a 15% tax bracket in retirement, you'll come out with nearly $100k more in your retirement account. However, you'll have spent $2,300 more per year for 30 years on contributions which eats up nearly $70k, leaving you only $30k total ahead.

Use calculators to help you figure it out:
Bankrate Traditional IRA Calculator
Bankrate Roth IRA Calculator
Schwab Roth vs. Traditional Calculator

Do keep in mind that the same contribution amount will have a different effective cost depending on which account type.
Link Posted: 8/20/2015 8:58:58 AM EDT
[#7]
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Quoted:
Your examples aren't correct though. You can put $5,500 into either traditional or Roth. Putting $5,500 into traditional will cost you $5,500 because the contributions are not taxed. Putting $5,500 into Roth will cost you roughly $7,800 assuming a tax rate of 30% (effective fed income tax + state income tax + Soc. Sec. tax + Medicare tax). Assuming you have the $7,800 today, you will end up with more in retirement.

Say you contributed to Roth for 30 years and it costs $7,800 to make the $5,500 contribution. Using an 8% rate of return, a 25% tax bracket while working, and a 15% tax bracket in retirement, you'll come out with nearly $100k more in your retirement account. However, you'll have spent $2,300 more per year for 30 years on contributions which eats up nearly $70k, leaving you only $30k total ahead.

Use calculators to help you figure it out:
Bankrate Traditional IRA Calculator
Bankrate Roth IRA Calculator
Schwab Roth vs. Traditional Calculator

Do keep in mind that the same contribution amount will have a different effective cost depending on which account type.
View Quote

Lets compare apples to apples here; you should be utilizing the same "pretax" equivalent value/cost. My examples reflect that, yours don't. Sure, you can say, "I'll contribute $5500 to the Roth instead of $5500 to the traditional" and of course its going to come out with the Roth looking pretty stellar on top, but you had to give up MORE of your take-home income to make that $5500 Roth contribution in place of the $5500 traditional contribution. I used $5,000 in pre-tax dollars as a nice, even number; the actual numerical value is irrelevant as long as you're comparing equivalent pre-tax values.

Keeping the "Cost" the same across the board my examples are accurate minus a few "neglected" finer points that I did make note of in my response. If you want a detailed example I'll go ahead and break it down in more detail, the math doesn't lie.

ETA: there is one distinct advantages to the Roth TSP that I can think of that is completely outside of any tax implications (other than the near-term income reduction you would gain from traditional contributions). Roth TSP contributions are not subject to income limits and the contribution limit is the same as that of traditional TSP limits ($18,000 this year). So if you're already contributing the max to your TSP and wish to contribute "more" utilizing the Roth TSP option is a way to do that. Your $18,000 contribution is already tax-paid, which allows you to get "more" money into the account (same amount of money but because you tax liability will be lower in retirement you'll end up with more money), and you'll pay the taxes now with money out of your take-home income. Note: if you have agency matching be careful not to over-do your contributions and lose your matching at the end of the year. Agency matching is always traditional type contribution so you'll still be on the hook for those taxes in retirement.
Link Posted: 8/20/2015 3:30:52 PM EDT
[#8]
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Quoted:
ETA: there is one distinct advantages to the Roth TSP that I can think of that is completely outside of any tax implications (other than the near-term income reduction you would gain from traditional contributions). Roth TSP contributions are not subject to income limits and the contribution limit is the same as that of traditional TSP limits ($18,000 this year). So if you're already contributing the max to your TSP and wish to contribute "more" utilizing the Roth TSP option is a way to do that. Your $18,000 contribution is already tax-paid, which allows you to get "more" money into the account (same amount of money but because you tax liability will be lower in retirement you'll end up with more money), and you'll pay the taxes now with money out of your take-home income. Note: if you have agency matching be careful not to over-do your contributions and lose your matching at the end of the year. Agency matching is always traditional type contribution so you'll still be on the hook for those taxes in retirement.
View Quote

This is mostly what I was getting at. If OP has enough income, which it sounds like he does because he's talking about maxing out the TSP, he may want to look harder at a Roth because he effectively puts more money in.
Link Posted: 8/20/2015 4:07:55 PM EDT
[#9]
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Quoted:

This is mostly what I was getting at. If OP has enough income, which it sounds like he does because he's talking about maxing out the TSP, he may want to look harder at a Roth because he effectively puts more money in.
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Quoted:
Quoted:
ETA: there is one distinct advantages to the Roth TSP that I can think of that is completely outside of any tax implications (other than the near-term income reduction you would gain from traditional contributions). Roth TSP contributions are not subject to income limits and the contribution limit is the same as that of traditional TSP limits ($18,000 this year). So if you're already contributing the max to your TSP and wish to contribute "more" utilizing the Roth TSP option is a way to do that. Your $18,000 contribution is already tax-paid, which allows you to get "more" money into the account (same amount of money but because you tax liability will be lower in retirement you'll end up with more money), and you'll pay the taxes now with money out of your take-home income. Note: if you have agency matching be careful not to over-do your contributions and lose your matching at the end of the year. Agency matching is always traditional type contribution so you'll still be on the hook for those taxes in retirement.

This is mostly what I was getting at. If OP has enough income, which it sounds like he does because he's talking about maxing out the TSP, he may want to look harder at a Roth because he effectively puts more money in.

That is a very valid thing worth mentioning, but it's use mostly irrelevant to the taxes until you are up against the contribution limit on traditional TSP. Assuming he's in an equivalent tax bracket now & then, the "end-value" will be mostly equivalent (they will actually favor traditional by a slight amount in many cases) for a given "input value". I felt as if the OP was asking which option is better for tax purposes and the information posted above by "thegeoguy" wasn't necessarily correct. I was simply addressing his claims that Roth with save a "shitload in taxes", when if fact, it doesn't always work that way. You just decide whether you want to pay them up front now, or down the road.

That being said, if the OP is up against his contribution limit and he wants to contribute more, he can go entirely Roth TSP contributions and while the amount of money in the account won't be "more" per-se. It will be "more valuable" because he will pay the taxes out of take-home pay (that doesn't count towards the contribution limit) and the resulting retirement account value (contributions plus growth) will be tax-free on the back-end.

Not many people have the problem that he has (up against the contribution limit and wanting to contribute more) so I didn't initially read his post as asking that specific question.
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