Contributing TOO Much to TSP?

[FatMoneyClip]

For the last couple years I have been maxing out my TSP contributions. This year I am considering contributing less, because my third child is about to be born. Since I provide the sole income for my family, I have numerous tax deductions and credits. If I max out TSP again this year, I will be making tax deferred contibutions on income that I would not pay taxes on if I just took it now (because of the numerous tax credits). How do I determine what is the proper contribution amount? Is there a publically available calculator for this?

The market is down so much, I would love to max out TSP again this year, but with taxes going up in the future, it might be better to take the money now. Any thoughts?

 

[SkyPilot]

There can be many factors that affect the decision you need to make. Mostly you have to figure where your money will do the most good. We all deal with competing needs and individual risk aversion.

I reduced my contributions to 5% so I still capture the matching contributions, and put the rest against my mortgage for now. This diversifies my overall portfolio as I am still allocated C and S.
However, this may be a great time to buy in to the market, as it should now be at bargain basement prices.

The question is, is the market ready to start back up, how long will it take and how much will it recover. Also, you need to consider what is your time horizon when you will need to tap your TSP account (not necessarily the date of retirement).


I also "tithe" and contribute offerings through my church. I find this is always a great "investment"!


"It is a wise man who trades what he cannot keep for what cannot be taken away"

Blessings "

 

[Show-me]

Go Roth!

 

[domingo3]

First of all, I think you can legally contribute up to the limits whether it gives you a tax benefit or not. Not sure if that was part of your question.
Second, I'll assume that since this is in the military section, you're not getting any match (unless you're in one of those pilot programs). You should then, almost certainly, max out a Roth IRA FIRST, and then contribute to TSP. If you're married, you, as a family, can contribute $10k to Roth IRA ($5k for you and $5k for your spouse). If you can save $26.5k and raise three kids, you're a much better money manager than I.
I would probably advise to put at least some of your money in taxable investments, but I don't know that much about you or your situation to really say.

Hope this helps. Send some more info if you want, and we can try to give better advice.

Good luck

 

[roskopfm]

Hey Fat Money. If you are in a lower tax braket MAXIMIZE THE ROTH!!!
instead of putting all the money int he TSP. Best thing you could do for yourself. Later in life when you pull the money out and have no dependends you will be more than likely in a higher tax bracket and get the withdrawal tax free.

 

[FatMoneyClip]

Thanks for the responses everyone. I have been following the advice about the Roth for the last few years AND will continue to do so. In fact, I have been maxing out my wife's Roth as well. I have already maxed out both Roth IRAs for 2009. But I need to decide how much I should put in the TSP.

As military and not part of the pilot program (I wish!), I do not receive any matching funds. My contributions are purely tax-deferred investments. However, because of the numerous tax credits my family is entitled to (child tax credit, saver tax credit, POSSIBLY even EIC this year), if I did not place the money in the TSP, I could receive it now at basically a 0% tax rate. If I investment that now is something (let say stocks), when I eventually sell the investment I will be only taxed on the gains.

If I place the money in the TSP instead, when I eventually make a withdrawal, I will be taxed on the gains AND the initial investment (it was tax deferred). Last year, I am certain that I over contributed to TSP (as a tax deferred investment) and wasted some of my tax credits. Yet how to determine what would be the optimal contribution? I think it is likely that someone made a calculator for this.

 

[Bullitt]

At the end of the day, whether the money is going to a Roth or TSP, you're still saving money for a later period in life. (Notice I didn't use the word retirement.)

 

[domingo3]

FatMoneyClip:
Another important factor in this equation is how much longer you intend on being in the military and what you plan on doing after. When you get out, there's an opportunity to get a big chunk of money into a Roth, rather than the stricter annual contribution limits.

 

[RunningFool]

I just wonder if Roths will turnout to be a giant bait and switch scheme by the government. At some point the government will go completely broke and will absorb all retirement funds to prop itself up. The Roths (as well as our TSPs) will be absorbed into SS or you will pay taxes on them or both. But then again the DOW could be at 16000 next year, you never know. I just find it increasingly hard to believe anything the government tells me anymore. Just like in an earthquake if the ground moves enough it is no longer solid and liquefies. Things that were once solid and never changed are now changed and continue to change. Never underestimate the things a desparate politician will do to stay in power. :notrust: