Traditional TSP vs. Roth TSP

[jennygeddes]

I'm an O-3 w/

 

[hrt4desh]

@jennygeddes Theoretically you’ll be in a higher tax bracket when you retire. Paying the taxes now is an advantage over paying more later. There’s many reasons, you just need to figure out which one is best for you.

If you plan on being a doctor outside of the military then you should consider a Roth. You’ll make more money

 

[jennygeddes]

@hrt4desh I was talking specifically the Roth TSP vs Trade TSP, not the Roth IRA vs Trad IRA

 

[hrt4desh]

@jennygeddes True but the reason behind the two are incredibly similar

 

[leahg77]

@jennygeddes Roth vs Traditional functions the exact same way regardless of the type of account (IRA/401k/TSP)

 

[bevm]

@jennygeddes So what Jopa said is kinda true but also a bit misleading.

To get the right answer you need to answer some questions.

Basically you want to avoid crossing the big 12%/22% tax threshold at around 80k taxable income.

Your job post military is irrelevant because these contributions directly affect your retirement income. As a Captain you make 50-80k depending on incentives and job bonuses. The question is do you plan to invest and have passive income during your retirement years specifically.

Are you married? This determines your deduction.

Are you planning on having a lot of income in retirement through investments or other passive income generation?

Your almost certainly safe putting most, if not all, of your contributions into Roth right now, but that could change depending on how much your pay increases.

 

[revelation2012]

@bevm It took me longer than it should have to realize this. I think a big contributor is almost everyone I know in the military promotes Roth because not all of our compensation is taxed. But I just don’t see any reason to pay a 22% rate.

 

[bevm]

@revelation2012 And not only is a large chunk not taxed a lot of people don't cross that 22% threshold period.

For a single person, the threshold is $39,500. The standard deduction is $12,400.

So $51,900. Then factor in what money is taxed. BAH and BAS is not. Base pay and incentive pays are.

As long as you're not exceeding that threshold, Roth is ideal.

The numbers are even better if you're married.

 

[revelation2012]

@bevm Absolutely! But officers can pass the threshold pretty quickly. Especially if spouses are earning income.

The other thing to consider is that if you have a brokerage account, any headspace you can generate below the 22% bracket will also save you money on capital gains taxes.

 

[bevm]

@revelation2012 True true. So both Traditional and Roth are viable, just depends on the individuals financial situation.

 

[jennygeddes]

@bevm

• current married
• planning on pulling between 60-80k/year income (obviously may change depending on life)
• Pay will increase from ~70k now to ~200K in 4 years. These are only my incomes, my wife is finishing up school, only currently makes ~18k, unsure of what shell make when she graduates.

 

[resjudicata]

@jennygeddes My opinion is that everyone should take Roth unless they 100% understand every single rule regarding tax sheltered accounts or have talked with a well-qualified financial advisor.

1. Roth puts more money into your retirement account. You can invest the same amount in each, but when you take it out only the Traditional loses a huge portion to tax.
2. Tax rates are likely to increase over time. This is an educated guess.
3. Roth is way more flexible. You can withdraw 100% of your contribution at any time without any penalty, and you can take out gains for a home purchase, education, or other specific scenarios prior to retirement.
4. Traditional requires minimum distributions based on age, while you can keep Roth invested until you die.
5. Roth has huge benefits for survivors over the Traditional options, although this exceeds the scope of this post.
6. Any good investor should make more in retirement than when they are young. Getting taxed now will save money in the long run.

If you're not maxing your TSP/IRA and otherwise investing wisely, then sure, a Traditional is a good enough option and it puts a few extra bucks in your pocket now compared to the Roth (but do remember that's only because you're not actually putting as much value into the retirement account).

 

[jennygeddes]

@resjudicata Thank you for the comment! After doing a bit more research, I definitely agree with you and I appreciate you summarizing what I found to be true

Most of the information out there was specifically Roth IRA vs Trad IRA so I was more familiar with the Trad TSP which is mostly why I was investigating in it.