[TSP traditional to roth] GS-7 what to do with $8,000 from first year of TSP contributions

[matt_hil]

hello all, i’ll keep this as transparent as possible. i’m very new to finance and investing, so my logic of thinking here may be skewed and feel free to add any corrections where i could be wrong.

i’m a new hire GS-7 and will go 7-9-11 within the next two years and throughout my career i expect to be in a higher tax bracket than what i am in currently. over 2020 i amassed ~$8,000 in my traditional TSP account thru the C/S index funds.

i want to jump ship to a roth account w TSP, but if i understand correctly, i can’t just swap it directly to roth funds. i’d have to cash out of my traditional funds, and put it into a separate roth ira somewhere (i think?).

if i take out the money from my traditional TSP funds now, should i: (a) open up a roth ira with someone like vanguard and pour it back all in there, so i will have roth tsp funds and a roth ira somewhere else? or (b) use the $8,000 to pay off parts of my student loan (2 separate $7,000 loans) which have crappy APRs? i’m currently going to get it refinanced w Sofi at a lower rate but will end up paying the same amount monthly as i am lowering the loan life.

NOTE: i will be able to afford paying all my monthly expenses (at the minimum rates) even without the extra $8k, but i’d like to get out of that student debt hole bc over 15 years i’d pay as much in interest as my original loan amount.

any advice here would be much appreciated, as r/militaryfinance has been very helpful bc my parents do not have any investing/finance guidance to offer

 

[spreading_the_gospel]

@matt_hil Don't take the money out of TSP, or sell it to put it in a IRA, that is a taxable event.
1) I would keep the money in the TSP.
2) contribute 5% to get match, its free money. Just remember match goes to traditional, not roth.
3) Open Roth IRA, contribute up to max 6k.
4) Continue to contribute to TSP up to 19500, (this doesn't include match).
5) When you can max TSP, and Roth, put the rest in taxable brokerage account.

 

[resjudicata]

@spreading_the_gospel Wait the match is only for traditional? I feel stupid.. I put like 20% away into Roth. How much do I need to put in traditional to get the max match rate? 5%?

 

[kitty346]

@resjudicata You can contribute to Roth to get the match. The match itself goes into traditional because no one’s paid taxes on that money yet.

 

[resjudicata]

@kitty346 Gotcha okay, scared me lol

 

[spreading_the_gospel]

@resjudicata You are entitled to the match on your Roth contributions, but those dollars from govt go into traditional account. So, no worries on 20% roth, no need to change to traditional, that match money is going to traditional.

 

[myrtleblossom]

@matt_hil You're getting some good advice but it's ignoring the high interest rate student loan. If you cash out your TSP you will pay income taxes on it and penalty taxes to the IRS. Don't do this right now, it's not worth it.

Priorities:

1) Change your contributions to Roth. Leave what is in traditional alone right now.

2) Reduce your contributions to 5% (for the match). Everything else goes to student loans.

3) All your raises go to paying off student loans.

Check out the Prime Directive at

https://imgur.com/lSoUQr2

 

[matt_hil]

@myrtleblossom this is great advice. thank you!

 

[jewlyen]

@matt_hil Just hold what you currently have in the traditional TSP. Change your contributions to Roth going forward.

Any option to get it out of the traditional TSP will create taxes and penalties.

 

[tiger2727]

@matt_hil Tsp withdraw you're going to pay taxes. Are you getting the tsp match? If so keep the money there and let it compound. Given access to the tsp you can consider it a part of your long term savings goals, not a temporary savings account to move money to another ira while your still able to get the above mentioned match.

 

[matt_hil]

@tiger2727 yes, i am getting the 5% matching. when i convert to GS-9 in august, i plan to raise my contributions such that my net income is the same, and so on with each promotion. are you suggesting that keeping it in the traditional account, so that i'll have traditional and roth TSP funds? if i'll be in higher tax brackets in the future, wont that mean i'm leaving some money on the table due to the taxes on my traditional funds when i cash out 20+ years from now, compared to the roth funds which are subject to my lower tax bracket taxes?

 

[tiger2727]

@matt_hil I actually missed your point of still staying in the tsp. I thought you wanted to pull all of your money from the tsp for an account outside of the tsp.

I would say contribute to both sides. I'm 42, contributed to the tso and now have an active duty pension. I have zero clue what my taxes will be in 17 years. Riding the fence, putting money on both sides ( trad and roth) is my guidance. Also starting a Roth outside of tsp as that's legal too.

I focused on paying my school loans off in 4 years from 2000 to 2004... but still had investments going. Even if it was 200 a month. Dollar cost averaging will be your friend over the years.

 

[matt_hil]

@tiger2727 thank you very much!

 

[fiiish]

@matt_hil Replying because I haven’t seen it yet-

When you retire you still get your standard tax deduction so you have space to withdraw traditional funds without tax. Having a healthy balance of traditional and ROTH is actually the most tax efficient you can be.

 

[matt_hil]

@fiiish so it can be possible that i may be able to deduct my traditional contributions, after i retire, and they be subject to only small amount of taxes?

 

[fiiish]

@matt_hil Yes. Back of the envelope math-
My wife and I have annual expenses of $40k in retirement. As married filing joint we get a standard deduction of 24,400.

If I take 24,400 out of traditional and 15,600 out of ROTH I still don’t pay any taxes on my retirement disbursements. In high tax years (no kids, stateside employment, dual income) it can be beneficial to contribute to traditional. In low tax years (deployment to CZTE, many kids, low income) it is best to contribute to ROTH.
Over the years a healthy balance of both can still be efficient in retirement.

 

[matt_hil]

@fiiish wow. i did not know that. thank you very much!

 

[tiger2727]

Also... do not assume this year will be the standard over your investing live. We will have a down market somewhere. That's when you want to buy buy buy.

 

[kgb52]

@matt_hil Step 1. Don’t move your traditional TSP

1. Leave it alone

3a. Contribute enough to get full match. Roth TSP

3b. Pay down your debt from your paycheck

1. Put $100-500/mo into Roth TSP or IRA

 

[tr1n1ty]

@matt_hil How bad is “crappy apr?” If you are below 30 and it is below 6% it probably makes more sense to invest in Roth TSP instead of aggressively paying down. That interest lives for the rest of your life. The interest on your loan will go away in 20 years.