ChemEng's Account talk...

[EW_ret]

Somewhere I read that you had to have a Roth for 5 years, before you could draw from it. Am I mistaken about this?

Pedaling hard to catch up with a diversified portfolio. All advice is welcome.

CB

Yes, the Roth account has to be opened for a minimum of 5 years and you must be at least 591/2 to avoid the penalty. But this just applies to withdrawing the earnings on the contributions. You can always withdraw your contributions without taxes, or penalty. That’s my understanding. I am unsure how you choose to withdraw just your contributions rather than contributions and earnings, prorated. I’ve never done it so I do not have first hand experience.

 

[ChemEng]

Think of it this way, and stop trying to compare TSP versus Roth. Contribute as much as you can to your TSP and use the tax-deferred savings to fund your Roth IRA. If you could contribute the maximum $15,000 to your TSP the tax-deferred savings would be 15,000X.30 = $4,500. This is more than the current $4,000 Roth limit. Your tax deferral and its earnings then becomes nontaxable in the Roth.

Ive been tracking your comments, but this lost me. The article you posted says that its now possible to convert IRAs into Roths, but it doesnt say how that converstion will occur. There is no mention to how they are going to switch from a pre-tax basis to a post-tax one. It surely isnt 1 for 1 is it?

How do I use the tax-deferred savings to fund my Roth? Suppose I make $100k in a 30% tax bracket. If I dont pre-tax invest, I bring home $70k. If I invest 15%, then my taxable basis is $85k and I now bring home $59.5k.

So where exactly do I get the $4.5k--err $4k--to fund the Roth from? If its from the $59.5k, then you could have just said "save more". I was trying to evaluate the two options given my current saving tolerances. But if its from somewhere else, Im missing it.

Thanks again for the discussion. Ive still got lots to learn, and I appreciate the time that all the smart people on the board volunteer.

 

[ChemEng]

I decided to roll the dice and hold onto 100% I today. Its looking like I should have used today as a buy-in day for F, C, or S. Oh well.

 

[EW_ret]

Ive been tracking your comments, but this lost me. The article you posted says that its now possible to convert IRAs into Roths, but it doesnt say how that converstion will occur. There is no mention to how they are going to switch from a pre-tax basis to a post-tax one. It surely isnt 1 for 1 is it?

How do I use the tax-deferred savings to fund my Roth? Suppose I make $100k in a 30% tax bracket. If I dont pre-tax invest, I bring home $70k. If I invest 15%, then my taxable basis is $85k and I now bring home $59.5k.

So where exactly do I get the $4.5k--err $4k--to fund the Roth from? If its from the $59.5k, then you could have just said "save more". I was trying to evaluate the two options given my current saving tolerances. But if its from somewhere else, Im missing it.

Thanks again for the discussion. Ive still got lots to learn, and I appreciate the time that all the smart people on the board volunteer.

When one converts a traditional IRA to a Roth IRA you pay the taxes on all money converted. In 1998 when Roth IRAs started, you had three years to pay the taxes due. Afterwards you had to pay all taxes due in the year you converted. So if you converted $10,000 and you are in the 25% federal tax bracket, you paid $2,500 in federal taxes, plus your state taxesl. There was a gross taxable income limit of $100,000 for all tax filers (single, HH and married) until the new tax law was signed. The new tax act allows two years to pay the taxes on a conversion, but you have to wait until 2010. Upper-income taxpayers will be able to convert their traditional IRAs to Roth IRAs beginning in 2010 and won't have to pay tax on the conversion until the following year, spreading their bill over two years.

Your taxes are lower when you contribute to the TSP. For the example you cite, instead of $30,000 on $100,000 you pay $25,500 on $85,000. It’s the tax savings, in the form of lower federal and state tax withholdings from pay, that you use to fund the Roth IRA. You save $15,000 in TSP account, $4,000 in the Roth IRA account, paid $25,500 in taxes and your net is $59,500. This totals $104,000. If you are single, the allowed Roth contribution is limited on gross taxable incomes over $95,000, and not allowed at all if over $110,000. By contributing to your TSP, your gross taxable income falls below the $95,000 threshold, in the case of a $100,000 income. If you are married, the allowed Roth contribution is limited on joint gross taxable incomes over $150,000, and not allowed at all if over $160,000. The new tax law did not change these Roth income restrictions.

 

[Eagle_Addict]

The TSP has a maximum contribution $15,000 yearly from you, not counting the government match.

I believe that the 15K limit on the 401k does include the Govt match portion. You can actually lose matching $$ if you put too much in, check this oit and make sure i ma correct, pretty sure I am....

EA

 

[vectorman]

I believe that the 15K limit on the 401k does include the Govt match portion. You can actually lose matching $$ if you put too much in, check this oit and make sure i ma correct, pretty sure I am....

EA

FERS Participants — You may elect to contribute any dollar amount or percentage (1 to 100) of your basic pay. However, your annual dollar total cannot exceed the Internal Revenue Code limit, which is $15,000 for 2006.

Good point, how does the IRS define " your annual dollar total " ?

 

[ocean]

I believe that the 15K limit on the 401k does include the Govt match portion. You can actually lose matching $$ if you put too much in, check this oit and make sure i ma correct, pretty sure I am....

EA

The $15K limit is allowed for TSP (in Federal retirement contribution, we call it as TSP, not 401k) contribution with the additional 5% matching for FERS.

There is only one scenario that the matching would stop when your contribution portion goes over the $15K during any part of the year. That’s why you would divide the $15K contribution evenly over 26 pay periods if you receive your pay check every 2 weeks. The 5% matching will be provided evenly over the 26 pay periods. On the other hand, for example, you reach your contribution limit of $15K at the end September by contributing too much and reached $15K by then, the matching will stop beginning in October. In this case, you would lose money on the matching.

We can use this figure to make sure we will not go over the limit before year end:

$15,000 / 26 period = $577 / period. (this is your contribution for each pay period)

With $577 contribution each pay period, you will ensure that you get the 5% matching over the entire year.

I am pretty sure that I am correct …

Ocean

 

[pyriel]

ChemEng,

EWGuy, Vectorman, and Ocean are all correct. Great advice and helpful...

P

 

[Birchtree]

And anyone deployed into a tax free zone can act like a bandit - but is all well deserved. What's the magic number around $44,000.00

 

[Dave M]

The Right Idea

EWG has the right idea -- max out your TSP. If you have any spare change, THEN go for the Roth. Where do you get the $4k? You get a little bit of it every pay period when they deduct less Fed tax from your pay.

Contributions into my TSP will total $24k this year.

Dave

 

[Show-me]

Re: The Right Idea

Just want everyone that reads this to be clear. Your $24k includes agency match?

EWG has the right idea -- max out your TSP. If you have any spare change, THEN go for the Roth. Where do you get the $4k? You get a little bit of it every pay period when they deduct less Fed tax from your pay.

Contributions into my TSP will total $24k this year.

Dave

 

[pyriel]

Re: The Right Idea

Contributions into my TSP will total $24k this year.

Dave

Wow, If 15k is maxed, and your full contribution is over by 9k (to include agency contribution which is limited to 5% of your taxed income) then your salary must be about 180k.

Unless of course, you are deployed?

;-)

 

[Dave M]

Oh If Only

If they paid humble weathermen that much, why would I ever retire?! No, I am over 50, so my fifteen + another fiver + the agency match amount to over $900 per pay period. That right there is a good reason be conservative.

Dave

 

[ChemEng]

Ive taken the advice and upped my contribution to $15k. I was uncertain about how to go about it at first because I had been only contributing a percentage, but EBIS allows for dollar amount contributions as well. So doing some quick math for $15k to be spread across 26 paychecks I would need to contribute $576. Thats quite a bump up from $358 (15%) I was paying. Using dollar amounts also has the added benefit of not having to be adjusted with every COLA and step increase.

I probably should have made the increase sooner, but I was desparately in "save for a house" mode. We're are closing on the property on Friday so I should be able to broaden my horizen a bit. (Im excited too... 3 acres, 1500 sqft, 3 car garage, barn. And on Friday its MINE. Well, ours. )

 

[atcsat64]

Congrads on the house, and good job taking the leap to max the TSP! You'll be glad you did it early in your career.

 

[ChemEng]

Now all I got to do is live long enough to be able to use it. Ive got over 30 years until my MRA. *chuckles*

 

[Pilgrim]

Now all I got to do is live long enough to be able to use it. Ive got over 30 years until my MRA. *chuckles*

Enjoy youth while you have it. I just hit MRA last year. I would gladly give back all this money I have accumulated to be 30 years younger.

 

[Birchtree]

Pilgrim,

May I suggest you not act your age and be down right aggressive with you investing - you have another 30 years to make money with your already accumulated position. Look risk in the eye and let'er rip for a more comfortable future. Keep the money - you can do a lot more with it - only perhaps not as fast as you could when you were younger. My wife is always telling me to act my age - lets me know I'm kosher.

Dennis

 

[ChemEng]

Looks like the traders had a nice power lunch this afternoon. They should eat it more often methinks...

 

[ChemEng]

Grrr... Some reason the trade I made on Friday did not go through. It still shows me at 100%G. Anyone else ever have this happen or should I just accept it as a fluke or user error?
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Disregard. I just went back to the website and it now shows my allocation as 20G, 20S, 60I. I suppose the website was just slow updating this morning. *shrug*