15k limit by year 2006. Are you ready?

[Pete1]

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michellenut - find out what your husbands options are then read the following books: The Four Pillars of Investing and The Intelligent Asset Allocator both by William Bernstein. There is a ton of very practical asset allocation information in both of these books. You may wantto try to read the books together with your husband so you are both on the same page regarding allocating retirement assets.

 

[grandma]

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Mike wrote:

If you desire better diversification (access to REITs, precious metals, commodities), you have to kick money into a Roth...

...why ?

 

[Mike]

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grandma wrote:

Mike wrote:

If you desire better diversification (access to REITs, precious metals, commodities), you have to kick money into a Roth...

...why ?

Since so many appear to be focused on kicking in the $15k maximum, that was the implied assumption of that post - meaning you couldn't do it via another IRA, since you are already maxing the TSP pretax contribution. Your only other options would be the Roth IRA or a brokerage account. If you haven't maxed the Roth, it makes no sense to do it via a brokerage account, since that would be funded with your net income (already taxed) and would be subjected to the capital gains tax.

 

[pyriel]

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Mike wrote:

Since so many appear to be focused on kicking in the $15k maximum, that was the implied assumption of that post - meaning you couldn't do it via another IRA, since you are already maxing the TSP pretax contribution. Your only other options would be the Roth IRA or a brokerage account. If you haven't maxed the Roth, it makes no sense to do it via a brokerage account, since that would be funded with your net income (already taxed) and would be subjected to the capital gains tax.

You are absolutely correct. I didn't even think about that. There is another way to max out the 15k pretax contribution and via TSP is not the only option. Thanks for bringing that up Mike.

On the other hand, reading my comments and Birch's input I can easily seehow your way of thinking differs from ours. We are both family men thinking of what we are going to be leaving behind and you are a bachelor living the life...

 

[michelleunit]

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Pete1-thanks for the names of those books...i'll check on ebay and the used book store here in town (it's HUGE!)...michelleunit

 

[Pete1]

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michelleunit - you may also be able to find them at your local library - I like to check them out every now and again for a refresher.

 

[Mike]

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pyriel wrote:

You are absolutely correct. I didn't even think about that. There is another way to max out the 15k pretax contribution and via TSP is not the only option. Thanks for bringing that up Mike.

On the other hand, reading my comments and Birch's input I can easily seehow your way of thinking differs from ours. We are both family men thinking of what we are going to be leaving behind and you are a bachelor living the life...

Our tax situations are also vastly different - I am *probably* in a lower tax bracket than the two of you. So, everybirchtree or Pyriel dollar that is getting kicked into TSP is generating greater tax savings than every Mike dollar. In 10-15 years, my tax advantage will probably have grown to the point where it no longer makes sense to fund the Roth before maxing out the pretax investment - especially given the fact that by that time, my Roth will be sufficiently large to provide a huge emergency reserve of funds.

As for your second point, my life is actually rather dull. I logged ~200 hours of OT last year and have logged another 200 this year so far. That doesn't leave a lot of time for other things... I'm basically living a 40 year old's life at 27 (sans the marriage, mortgage payment, wife, and kids).

 

[EW_ret]

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I' am not contribution the max 15K because I am retiring in a few weeks. If I were not retiring I would try to contribute the Max but that would be a big jump from the 10% I now contribute.

My opinion is it isbest not to put all your eggs in one basket. You need all three 401K, Roth IRA, and taxable stock/mutual fund accounts. A balanced approach assures best for future regardless of the tax bracket your in. My hope is we'll keep the low tax rates on capital gains and stock dividends. If the rates go up my Roth IRA has advantage. If income tax rates go down, the 401K some advantage. The low 15% tax rate on capital gains and stock dividends is great for those with large taxable accounts. So, its good to have all three types of accounts in balance.

Mike, Your doing just great! For a young person its good if they canset aside 10%of gross income into savings. It sounds like you are over 20%. The amount one can set aside for retirement depends upon income, location,and family responsibilities. I did not start saving until I was 36 years old. I wish I could have started earlier but I had four children and responsibility. I really saved the most (20-30%) the past ten years (46-56 years) when the family responsibilities eased.

 

[cowboy]

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Congradulations on your retirement coming up EWGUY!!! :^Here is a poem to help you celebrate. This lady is a Cowboy Poet and a very good one!

[align=center]When you step through the open door
That memory leaves ajar,
Please bring your sense of humor
And together we'll go far.

Please set aside a little time
To just sit down, relax.
Disconnect the telephone,
And do turn off the fax.

Return with me to other times,
When life was much more simple.
When we saw joy in smiling eyes,
And noticed every dimple.

Carver Country Poetry
P.O. Box 115
Mesa, CO 81643-0115

Or if you would like to email her, you can do so at: NonaKelleyCarver@cdmsinc.net[/align]

 

[michelleunit]

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Pete1-i'll check ou the library, i'm guessing i don't need to buy the books when i can borrow them for free..saves me a few bucks!

thx-michelleunit

 

[Birchtree]

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And just when everyone thought it was safe to go back in the.....comes the Roth 401(k).

One reason the Roth 401 (k) is expected to be most attractive to high-income workers is that it will mark the first time they have access to a savings account that offers tax-free withdrawals in retirement. Look for it to appear at your TSP plan in the not to distant future. The only other savings account that offers that benefit, the Roth IRA, carries strict income restrictions - it is off limits to single filers who earn more than $110,000 a year, and for joint filers who earn more than $160,000 a year. The Roth 401 (k) carries no such restrictions: Anyone can invest in one so long as the employer provides this option.

The other group that stands to benefit from Roth 401 (k) contributions are young people in low tax brackets who expect their income to climb and carry them into higher brackets in the future. The only drawback is that this group can rarely find enough spare cash to contribute to their standard 401(k), never mind a Roth.

 

[Pete1]

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It is my understanding that ifparticipants are offered the option to contribute to a Roth TSP in lieu of a traditional TSP, the cap for all contributions is still $15K, this is not a new saving opportunity in terms of how muchparticipants can contribute. Also, the Roth TSP would be subject to RMDs at 70.5. Although not a huge consideration for me, it would be interesting to know if the RMD goes away if participants rollover a Roth TSP to a Roth IRA.

Upon reviewing our current tax situation, Iamconsidering maxing a Roth TSP for the following reasons:

1. Current tax bracket: I am currently in the 15% bracket and my wife is currently not working. If my wife goes back to work or I get a promotion, we would bump up to the 25% bracket. As a result, our bracket can only go up between now and retirement and willcertainly not be lower in retirement.

2. Future tax bracket:I do not have a crystal ball regarding futuretax brackets and so, as others have pointed out, hedging with a Roth TSP makes sense for me. Many current tax cuts and savings opportunities are set to expire in 2010 including Roth 401Ks.

3. Invesment Options and Expenses: The TSP funds are the cheapest that I know of in terms of expense ratio.Also, Congress isapplying pressure on the TSP Advisory Board to add more funds. As a result, for me personally, the scale tips in favor of a Roth TSP verses Roth IRA in terms of investment options.

4. RMD: RMDis not a huge deal for me as we plan to spend as much as possible before death (no kids to leave it to). Would still be interesting to know the rules on Roth TSP rollover to Roth IRA in terms of RMD.

I realize that this post is an about face from my previous posts on this topic and I reserve the right to change my mind between now and 1/2006.

As always, financial decisionsare personal decisions - everyonereading needs to assess their tax situation and do what they feel is best for themselves. If you are not sure, consult a professional (CFP, CPA, JD, etc.). The same applies for asset allocations decisions - if you are not sure how to distribute your assets, consult a professional.

Take care

 

[Birchtree]

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Pete 1,

There is no Roth TSP available at the current time - this is only a future possibility. There would be no RMD on the Roth TSP because all the money contributed would be post tax, the IRS does not have a vested interest. I'm waiting for the opportunity to be presented that would allow me to convert my defined benefits pension to a defined contribution plan - this provides the capability to control your income while in retirement and therefore have a chance to control the tax bracket. Once retired, everything is impacted by AGI.

Any time a company can get away from the legacy costs of a pension plan the better off they are, retirement can last a long time for some. That's a heavy burden on a company trying to make profits in a global competitive environment. Look what has happened in the steel industry and now airlines - they all go chapter 11 and give up their legacy costs back to the government. That's why we have had an explosion in the offerings of 401(k)s - the employee is responsible for accumulated retirement benefits. I think TSP is slowly moving in the direction to eventually allow a defined contribution - they are building the infrastructure to provide some flexibility.

Dennis

 

[Pete1]

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Dennis - understood regarding the Roth TSP option. Hopefully, they will add the Roth TSP as an option for participants of the plan in 2006. If they do, I am leaning towards using it. RMDs will apply to Roth 401Ks. Do a search and you will see - it is the biggest difference between a Roth 401K and a Roth IRA that I was able to find.

 

[Birchtree]

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Pete 1,

For some people a Roth 401(k) would certainly make life simpler - no need to roll to a traditional IRA and then to a Roth IRA. The RMD requirement may be because of the amounts that can be set aside in a Roth 401(k) verses a regular Roth IRA. But it stll leaves the owner in charge of the income - which is tempting to me. I'm thinking that if more of the working population is pressed into active investing - the demand alone should enhance any bull move that is in progress. The next ten years should be full of opportunity for an individual that is capable and willing to assume responsibility for the future. All the public has to do is not vote for the donkey party.

Dennis

 

[Show-me]

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Hey Pete1,

I to have done an about face on this subject too. That’s the great thing about this MB. I have had my eye’s opened to different options and methods of saving (Mike). My new revised plan is to put 5% into my TSP for the matching funds and fully fund my and my wife's Roth IRA accounts. No one can predict the future but I have a aching feeling taxes will be higher in the future. If not great!

Changing your position is not a bad thing, it mean you are think about your future and doing something about it. Cool! Me too!

 

[pyriel]

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Pete1 wrote:

4. RMD: RMDis not a huge deal for me as we plan to spend as much as possible before death (no kids to leave it to). Would still be interesting to know the rules on Roth TSP rollover to Roth IRA in terms of RMD.

Pete1, I've always wanted to have a father figure here in TSPTalk. Can you adopt me so you'll have someone to leave your vast retirement holdings when you are gone (whatever is left). I promise to not squander them for you...P

 

[pyriel]

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Birch and Pete, On a serious note, how could there be an RMD for a post tax retirement system. RMD was set for Traditional IRA, TSP, and 401k because Uncle Sam wants to get paid. A post tax retirement system like ROTH IRA there is no RMD (unless you are leaving it to a beneficiary). I would think that it will be the same as ROTH 401k.

Additionally, If ROTH 401k is post tax, how much can we max? Is it 15k as well. 401k, TSP, and traditional IRA has a cap of 15k for next year according to the IRS because they are pretax which means that we are deferring payment on taxes to Uncle Sam till later down the years. But ROTH 401k is post tax so current regulation stipulated bythe IRS does not apply.

I would think that ROTH TSP will havea cap just like ROTH IRA. If this is the case, I will have to rethink and rebalance my portfolio and divert all my ROTH IRA contribution to ROTH TSP (for now) and then transfer them back to to ROTH IRA later down the years... Very interesting...

 

[Pete1]

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Thanks, everyone. Pyriel - not quite a fortune but hopefully, will be enough to stay away from the cat food line. I have heard $15K will be the annual max. Could be all to tax deferred, a combination of both, or to a Roth 401K, just can't exceed $15K annually.

 

[Mike]

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Call this a hunch:

All tax deferred accounts share a combined max contribution of $15k next year.

This leads me to conclude that if the government is following this logically, all post-tax (read: Roth) accounts would share the same maximum ($4k this year*) as well.

*= assumes you are not eligible to make catch-up contributions.